Despite a booming housing market and rapid job recuperation, the Bank of Canada warned that the country’s economic recovery will be “heavily reliant on policy support.”
The Bank made the statement during its interest rate decision Wednesday, where it left the key lending rate unchanged at its “effective lower bound” of 0.25%.
“As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support,” the BoC said in its statement. “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”
Looking at recent economic data, it’s easy to feel as though Canada is out of the COVID-19 woods and that a V-shaped recovery is well underway.
Home sales are setting new records, prices are back to pre-COVID levels in many markets, household spending has rebounded and more than half (55%) of the three million jobs lost due to the pandemic have already been regained.
But the BoC warns that despite this “encouraging” data, the recuperation phase is expected to be “slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”
As such, the Bank reaffirmed its commitment to its quantitative easing (QE) program and to keeping interest rates low to stimulate economic activity. It has been doing this by purchasing $5 billion worth of government bonds each week, which has flooded the market with additional liquidity and in turn kept fixed rates lower. The BoC confirmed this “will continue until the recovery is well underway,” which it says will probably be sometime next year.
“The [Bank of Canada] statement noted the better-than-expected rebound, but it’s crystal clear that road to a full recovery and a closing of the output gap will a very long one,” wrote BMO economist Benjamin Reitzes. “The Bank remains firmly committed to providing ‘extraordinary monetary policy support’ for some time…likely years.”
Bond yields were little changed following the announcement, meaning the Bank’s announcement didn’t change the market’s future interest rate expectations.
What is also clear is that negative interest rates seem firmly off the table now.
“…the BoC noting once again that rates are at the ‘effective lower bound’ should put any talk of negative rates fully to bed,” added Reitzes.