Bank of Canada holds rate steady, says third quarter rebound faster than expected

FILE PHOTO: Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa
FILE PHOTO: Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario, Canada June 22, 2020. REUTERS/Blair Gable

September 9, 2020

By Julie Gordon

OTTAWA (Reuters) – The Bank of Canada on Wednesday held its key overnight interest rate steady at 0.25%, as expected, and said the bounce-back in economic activity in the third quarter was looking to be faster than previously anticipated.

Despite that slight optimism, the central bank noted in a statement with the rate decision that as the Canadian economy moves from the recovery phase to a bumpier recuperation phase it will continue to require extraordinary monetary policy support.

“Not really all that much of a change in tone from the July meeting, despite some slightly better numbers than the Bank was expecting at that time,” said Josh Nye, senior economist at RBC Economics.

The Canadian dollar was trading 0.4% higher at 1.3189 to the greenback, or 75.82 U.S. cents, with the loonie extending its recovery from an earlier three-week low at 1.3259 after the BoC announcement.

The central bank said “the bounce-back in activity in the third quarter looks to be faster than anticipated in July,” and noted that government programs to replace incomes and subsidize wages have been supporting economic activity.

Canada will this month start to transition people off its main COVID-19 emergency income support program and onto traditional unemployment benefits, which critics say will leave some Canadians with less money.

BoC Governor Tiff Macklem will give a speech on the uneven effects of COVID-19 on Thursday.

The central bank also said that both the global and Canadian economies are evolving broadly in line with the scenario it set out in July, but noted a stronger than expected rebound in the United States, Canada’s largest trading partner.

It also repeated that its quantitative easing (QE) program will continue until the recovery is well underway, but added the program “will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation target.”

This “suggests that the QE program will be the first policy tool tweaked if any changes are needed,” said Benjamin Reitzes, macro strategist with BMO Economics in a note.

Still, analysts said the decision and statement were broadly in line with expectations.

“No changes to policy and no real surprises and we will just see what will happen in October,” said Andrew Kelvin, chief Canada strategist at TD Securities.

(Reporting by Julie Gordon and Steve Scherer in Ottawa, Fergal Smith, Jeff Lewis and Allison Martell in Toronto; Editing by Chizu Nomiyama, Grant McCool and Marguerita Choy)