How do you sum up the BoC’s statement in one word? QEzzzzz…..

The Bank of Canada reaffirmed commitments to an extended period of being on hold at 0.25% and ongoing quantitative easing. Wording changes here and there largely cancelled out one another in terms of their overall significance to the picture that lies ahead. I think the BoC is in wait mode and will elaborate upon what they’re waiting for in a moment.

There was very little market reaction, if any. The Canada two year yield didn’t budge and the 10 year yield rose slightly after the statement but generally in sync with US 10s. CAD appreciated somewhat to the USD post-10amET, but oil prices also climbed at the same time and CAD is a middle of the pack performer to the USD.

On the slightly hawkish side was acknowledgement that the US and Canadian recoveries have been stronger than expected thus far. We see this in reference to the US where the BoC said the rebound “has been stronger than expected.” We also see it in reference to Canada where they say the recovery in Q3 “looks to be faster than anticipated in July.”

On the dovish side, the BoC reaffirmed its commitment toward continuing its QE program with an unchanged focus upon purchases of Government of Canada bonds of at least C$5B per week. They reference how they expect the initial recovery “to be followed by a protracted and uneven phase, which will be heavily reliant on policy support.” They reference continued forecast ambiguity that is dependent upon the path the covid-19 virus takes from here.

To back this up, the BoC repeated its forward rate guidance that says the policy rate will remain at 0.25% “until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” They also repeated the QE guidance that the program “will continue until the recovery is well underway.” That’s a bit of a tough sell given their overall purchase programs stopped growing weeks ago (chart 1). Governor Macklem has previously provided a very vague definition of what this means by saying it refers to a period between the initial phase of recovery and the closure of spare capacity.

 

One could debate the significance of the change in the final paragraph but I don’t personally think it is meaningful. The BoC said in July that “the Bank is prepared to provide further monetary stimulus as needed.” Today they struck that out and instead said the QE program “will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.” Being prepared to add more could well be construed as meaning the same thing as calibrating the program. Plus, this is not the Fed, where markets hang in the balance on every single little wording change.

In my opinion, the Bank of Canada is in a holding pattern pending a handful of major potential developments that may determine next steps into year-end. One is how they are reading movement toward the Federal Liberal government’s throne speech two weeks from today and what it potentially tees up by way of a possible further spending spree. Two is the evolution of the pandemic as Canadian cases rise particularly in western Canada (chart 2). Three is whether the faster than expected rebound of late is sustainable or results in a future pulled-forward demand vacuum that is reminiscent of what Federal fiscal stimulus and rate cuts did in 2015–17.

Until we have further clarity on these matters, the BoC is taking a nap. Hence QEzzzzz. Tomorrow’s speech by Governor Macklem (12:30pmET) will be the next focus. His topic is “The uneven effects of COVID-19 on different sectors and people in the economy” which implies more of a micro than macro emphasis that could downplay progress in aggregate by pointing to areas of weakness and inequality. The press conference at 1:45pmET may carry further risk if topics like the BoC’s strategic review, average inflation targeting and yield curve control are broached.

Go here for the original statement and please see the accompanying comparison of the September and July statements. 

 

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