Bank of Canada Holds Steady Ahead of Possible July Taper

(Bloomberg) -- The Bank of Canada left its key interest rate at historic lows and maintained its current pace of bond purchases in a placeholder decision that should keep expectations intact for another reduction in emergency stimulus next month.

In a statement Wednesday from Ottawa, policy makers led by Governor Tiff Macklem said they held their overnight policy rate at 0.25% and they retained a pledge to not raise it until damage from the Covid-19 pandemic is fully repaired. The bank also said it would continue to buy C$3 billion ($2.5 billion) a week of Canadian government bonds, while reiterating that the pace of asset purchases will decline as the recovery proceeds.

The tone of Wednesday’s decision was largely expected by analysts, who anticipate a gradual tapering of bond purchases. The central bank was among the first from advanced economies to shift to a less expansionary policy in April, when it accelerated the timetable for a possible interest-rate increase and pared back its bond purchases. Another taper is expected at the Bank of Canada’s decision on July 14.

The central bank is continuing asset purchases to “keep interest rates low across the yield curve,” policy makers said in the statement. “Decisions regarding adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery.”

There’s nothing in the statement that suggests the central bank is pushing back against further gains in the Canadian dollar, even as it acknowledged the currency has gained along with commodity prices. The loonie is up 5.5% against the U.S. dollar this year.

The benchmark five-year government bond held steady at 0.86% after the decision. The Canadian dollar touched a session high of 1.2059 per dollar, before paring gains.

Waiting Game

In April, the Bank of Canada scaled back its weekly purchases of government debt by a quarter to C$3 billion. Analysts anticipate that will come down to C$2 billion per week in July, before eventually falling to a weekly pace of about C$1 billion by no later than early next year. That would bring the central bank to a neutral pace of purchases where holdings remain unchanged as securities mature.

Wednesday’s policy decision was a statement-only affair with no new forecasts. That’s one reason why economists believed there would be no policy change until the next meeting, when a fresh set of projections will be released. Waiting until July also gives the bank time to reassess incoming economic data, as the nation emerges from a fresh wave of lockdowns.

Deputy Governor Tim Lane will give a speech on Thursday that will provide some more insight into the policy deliberations.

The Bank of Canada has said it will bring net purchases of bonds to zero before it starts to consider raising its policy rate, with swaps trading suggesting investors are pricing in an 80% chance of a hike over the next 12 months. Three rate hikes over the next two years are fully priced in, which would leave Canada with one of the highest policy rates among advanced economies.

In the U.S., investors aren’t pricing in any rate hike by the Federal Reserve over the next year, and only one over the next two years.

Risks remain. Since the last policy decision, Canada has been hit harder by winter Covid-19 restrictions than the Bank of Canada had been expecting. The economy went into reverse in April and May, losing 275,000 jobs -- bringing Canada further away from employment levels that Macklem considers a full recovery.

Gross domestic product grew at an annualized rate of 5.6% in the first quarter, below projections. But the Bank of Canada appeared to downplay the miss, calling the expansion robust and characterizing the underlying details as indicating “rising confidence and resilient demand.”

Officials also said they expect the economy to recover quickly in coming months from a slowdown in the second quarter stemming from a spate of lockdowns over the winter. They cited strong growth in foreign demand and commodity prices as a tailwind for the economy.

“While we tend to focus a lot on real GDP, Canada is seeing a big rebound in nominal activity, tied to commodity prices,” Derek Burleton, the deputy chief economist at TD Bank in Toronto, said on BNN Bloomberg Television. “That leaves the bank a bit optimistic, and that is warranted, I think.”

©2021 Bloomberg L.P.