BOC Recalibrated QE with Focus on Long-term Bonds. Downgraded Growth for 2021

BOC left the policy rate unchanged at 0.25% in October. The central bank explicitly noted that the policy rate will stay unchanged at least until 2023. Meanwhile, it announced to “recalibrate” the QE program, reducing weekly purchases “gradually” to at least CAD 4 billion and turning the focus to long-term bonds. BOC revised higher economic forecast for this year, while downgraded growth in 2021. Inflation will stay below target throughout the forecast horizon. USDCAD rallied to a 3-week high as BOC delivered a cautious economic outlook and tilted the QE program.

BOC remained cautious about the global and domestic economic outlook. Globally, it projected world GDP to contract -4% this year, up from -5.2% estimated in August, this year, GDP will expanded +4.8% in 2021, compared with August’s forecast of +5.2%. At home, GDP is expected to declined -5.7%% this year, better than the -7.8% contracted projected in August. The upgrade was driven by stronger-than expected improvement in employment and GDP after reopening of economy through the summer. However, GDP growth in 2021 is downgraded to +4.2%, from +5.1% estimated in August. Growth in 2022 is projected to be +3.7%. Headline CPI is expected to decelerate to +0.6% y/y this year, unchanged from August’s forecast, before picking up to +1% y/y (down from August’s +1.2%) in 2021 amd +1.7% in 2022 (unchanged).

BOC also sharply lowered potential output growth from around +1.8% to +1.2% in 2022 and 2023. Additionally, the neutral rate was revised down to 1.75%-2.75%, from the range of 2.25%-3.25% previously.

BOC’s Updated Economic Projections

On the monetary policy, BOC reiterated the forward guidance that the policy rate will stay unchanged at the effective lower bound “until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”. At the October meeting, it added that a rate hike will unlikely happen until “into 2023”. On the QE program, BOC indicated that it will shift purchases towards longer-term bonds which have“which have more direct influence on the borrowing rates that are most important for households and businesses”. Total purchases will, however, gradually, reduce to at least CAD4B/week, from CAD5B/week previously. The program will continue “until the recovery is well underway”. Policymakers believed that “with these combined adjustments, the QE program is providing at least as much monetary stimulus as before”. Concerning additional policy tools to stimulate the economy, BOC affirmed that negative is  a tool in the toolkit. Yet,  the bar to deploy this is very high.