Bank of Canada stays loyal to its promise of low rates and bond purchases

On Wednesday, the Bank of Canada kept its key lending rate unchanged and reiterated its commitment to provide the current level of borrowing costs until excess capacity is absorbed.

The BoC’s Governor Tiff Macklem said the Bank will keep the interest rate at 0.25% until economic slowdown is absorbed so that the 2% target inflation could be reached. However, there was no mentioning of providing more stimulus in case it’s necessary.

In addition to it, policy makers restated a promise to buy at least $5 billion a week in federal government bonds in order to keep borrowing costs low.

“During this switch from reopening to recuperation, the national economy will still require significant monetary policy support,” – the Bank noted.

In general, the policy statement is mostly unchanged from July. It’s part of the Bank’s approach to help the economy get out of the deepest downturn since the Great Depression, which includes the commitment to all possible measures. And we’ll hardly see policy makers leaving this stance even amid signs of a faster than expected economic rebound.

According to the BoC, the economy is moving right in line with its July forecasts, although the bounce back in Q3 seems to be faster than predicted.

The output was down by 13% in the second quarter from the end of the previous year, marking a significant decline.

GDP results in June and July also show that the recovery is stronger than the Bank expected. As a result, the economy may eliminate spare capacity well before the two-year period Macklem predicted.

However, today’s statement was an effort to dial down the general optimism.

“Business confidence and investment are still restrained,” – the Bank says. “Although recent data during the reopening phase is quite encouraging, the Bank still believes the recuperation phase will be slow and unsteady, as the economy is facing the current uncertainty and structural challenges.”

The BoC has committed to no rate changes until excess capacity is absorbed, and, according to its forecasts, it could lead to low rates until at least 2023.

In October, we’ll see the Bank’s new economic forecasts, and Macklem will give a speech at press conference on Thursday.