BOC Pledges to Continue with Easing Until Inflation Returned to +2% Sustainably.

As widely anticipated, BOC maintained both the policy rate and all the asset purchases programs unchanged at the July meeting. While acknowledged positive economic developments since the last meeting, policymakers cautioned that the economy’s recuperation will be slow and pledged to maintain the ultra accommodative monetary policy. They took one more step this month by providing an outcome-based forward guidance, pledging to “hold the policy rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. We expect the policy rate will stay unchanged at least until 2023.

The members noted that both “the global and Canadian outlook is extremely uncertain, given the unpredictability” of the coronavirus pandemic. Therefore, Monetary Policy Report (MPR) presents a central scenario of economic forecasts, rather than economic projections as in January and prior. The central scenario assumed the country’s economy slumped -43% (annualized) in 2Q20, the more optimistic end of the range of scenarios described in April. An annualized +31% rebound in Q3 is expected reverse about 40% of the decline in economic activities in 1H20.BOC projected that real GDP will contract -7.8% y/y this year, followed by a 5.1% rebound in 2021 and +3.7% in 2022. These projections were made under assumptions that there is no widespread second wave of the virus.

On the monetary policy BOC left monetary policy unchanged at “the effective lower bound of 0.25%”. Meanwhile, the size of government bond purchases also stays at “at least CAD 5B per week”. All other liquidity programs and the provincial and corporate bond purchase programs will also continue, despite noting that “with reduced market strains, their use has declined”. Additionally, BOC introduced another policy tool – outcome-based forward guidance- at the meeting. It pledged to hold the policy rate at record low “until economic slack is absorbed so that the 2% inflation target is sustainably achieved”. Meanwhile, the central bank suggested that it would continue with the QE program “until the recovery is well underway”.