Keeping the rate at its effective lower bound will support Canada's economic recovery, analysts say
The C.D. Howe Institute’s Monetary Policy Council called on the Bank of Canada to keep its key overnight rate at 0.25%, at least until December 2021.
Eight of the nine members of the council called for the overnight rate to remain at 0.25% in the BoC’s upcoming December 9 announcement. The remaining member called for a setting of 0.10%.
Aside from keeping the central bank’s monetary stance consistent with its stated 2% inflation target, freezing the rate at its effective lower bound will help support the positive effects of rebounding trade volumes and strong commodity prices, the council said.
“Several members emphasized the strong incomes and high saving rates of Canadian households, which likely prefigure continued strength in consumer spending and residential investment, especially as vaccination protects a growing proportion of the population from the coronavirus,” C.D. Howe reported.
Another major factor in these considerations is the steadily increasing gap between the economy’s actual output and its maximum potential output.
“Simultaneous down- and up-shifts in demand and supply in some sectors meant that total slack in the economy has been less than the paths of aggregate measures such as GDP would indicate,” C.D. Howe said. “Given continued uncertainty about the course of the pandemic and its economic impact … the majority of members were comfortable with the current level of the overnight rate for some time to come.”
The council also called on the central bank to scale back its quantitative easing program of purchasing at least $4 billion of government bonds every week.
“[Council] members noted that many measures of inflation remain close to the 2% target, that wage growth is strong, and that the spread between nominal and real-return bonds has been widening,” C.D. Howe said.
