Bank of Canada deploys an additional policy tool: forward guidance – RBC

At the July meeting, the Bank of Canada held monetary policy unchanged as expected. Josh Nye, Senior Economist at RBC point out the forward guidance presented by the central bank suggests no interest rate hike before 2023. 

Key Quotes: 

“The bank did deploy an additional policy tool: forward guidance. Governing Council is pledging to keep the overnight rate at its current level until the economy is back at full capacity and inflation is sustainably at the bank’s 2% target.”

“Based on economic projections in the MPR, that won’t be until 2023 or later. By reducing expectations of future short-term interest rates, this forward guidance is intended to keep longer-term borrowing costs low—a goal that is supported by ongoing asset purchases. As Governor Macklem clearly stated the bank wants Canadians to know that borrowing costs will remain low for a long time.”

“We continue to think asset purchases will continue at least through the first quarter of 2021, and likely well into next year.”

“The bank thinks permanent scarring from the COVID-19 pandemic (less investment, less immigration, permanent business closures) will reduce the economy’s long-term productive capacity by 4%. So even when the economy has recovered to “full capacity”—which, again, the BoC doesn’t see until at least 2023—GDP will be notably smaller than the previous trajectory we were on.”