The Bank of Canada decided to set the overnight interest rate at 0.25% and sent out a signal to the market that it was not considering dropping the policy rates to the negative zone. The bank is likely to keep going with its large-scale asset purchase program (Quantitative Easing or QE), which is currently being recalibrated. A few weeks ago, the bank had announced its decision to end its purchases of Canada Mortgage Bonds, Repo, and Bankers Acceptance, as they were no longer required for ensuring liquidity in these markets. Purchasing volumes have been declining since April and so, this decision is unlikely to have any significant impact on prevailing interest rates in the market.
The Governing Council has also decided to lower its federal government bond purchases from $5B to $4B per week. It stated that the QE program combined with these adjustments was ensuring ample monetary stimulus in the market.
Governor Macklem has been repeatedly warned by the opposition party about the drawbacks of financing government spending. However, the Bank doesn’t have any other alternative other than increasing its purchases of the newly launched benchmark bonds, which are being sold right now. Bloomberg News reported that the bank’s QE program would be mirroring the government’s debt sales increasingly despite warnings from opposition lawmakers who argue against the bank directly financing the Prime Minister’s fiscal agenda. As of now, the Bank holds over 33% of outstanding government debt, which is quite more compared to other central banks. This was only possible due to Canada’s budget surpluses over the years, which was used for paying down debt.
Almost all major central banks around the world are implementing emergency QE measures due to the coronavirus pandemic. The Bank of Canada stated that its quantitative easing program showed its resolve to keep interest rates low for the next couple of years until inflation reaches 2%. The overnight interest rate is likely to be set at 0.25% at least until 2023, as per the latest reports.
The bank does not intend to cut back the stimulus either, especially since the economy is once again in peril due to the second COVID-19 wave. The bank stated that extraordinary support will be required to prop up the economy for now and that it was prepared to infuse the stimulus needed to ensure recovery.
The interest rates are going to stay low, at least for the next couple of years. The COVID-19 pandemic shall dictate the economy’s recovery and the response of the government. Experts believe that the second wave might last into February and that a mass-produced vaccine won’t be available for distribution until 2021. While this news is not exactly uplifting, Canada has had much better success in dealing with the pandemic, compared to the UK, Europe, and the USA. Output levels aren’t likely to exceed pre-pandemic production levels, at least until 2023, as per a report from the central bank.