Canada holds rate, QE, and gains confidence in recovery

     Canada's central bank left unchanged its key interest rate, forward guidance and asset purchases, as expected, adding it was "continuing to gain confidence in the strength of the recovery" and would adjust the pace of purchases of government bonds as required while continuing  to provide the "appropriate" degree of monetary stimulus to support the recovery and inflation objective.

     The Bank of Canada (BOC) maintained its target for the overnight interest rate at what it has described as "the effective lower bound" of 0.25 percent along with the bank rate at 0.50 percent and the deposit rate at 0.25 percent.
     BOC also maintained its current pace of asset purchases under its quantitative easing program (QE) at $4 billion a week, unchanged since October last year when it trimmed the weekly amount of purchases from $5 billion as part of a shift toward purchasing longer-term bonds that more directly impact the borrowing rates that affect households and businesses to keep the actual monetary stimulus steady.

     BOC's key rate has been unchanged since it was slashed three times in rapid succession in March last year, at the height of the COVID-19 pandemic crises, when it also began the asset purchases.

     "While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary monetary policy support," BOC said as it seeks to balance a faster-than-expected economic recovery against considerable economic slack and uncertainty over the path of the virus.

    As in most countries around the world, growth in Canada has been stronger in recent months than expected and as the pace of the global recovery picks up speed, financial markets are starting to price in faster growth and a less accommodative policy stance by central banks.

     Canada's central bank is among those are expected to trim their stimulus in coming months and while BOC was careful not show its hand today, it acknowledged that economic growth in the first quarter of 2021 is now expected to be positive rather than negative, as projected in January, and the near-term economic outlook is stronger.

     Analysts had widely expected the BOC in its statement today to maintain its stance and commitment to keeping its key rate at the current level until the 2 percent inflation target is achieved, which is pencilled in for 2023.

     Instead, they expect the first shift in tone to come in April when BOC updates its economic forecasts to reflect the higher-than expected 9.6 percent jump in gross domestic product in the fourth quarter of 2020 due to a more resilient economic performance than expected in response to the second virus wave.

     In January BOC forecast growth of 4 percent in 2021 after a decline of 5.4 percent in the full 2020 year, and then growth of almost 5 percent in 2022 and around 2.5 percent in 2023.

     This week the OECD revised upwards its economic forecast sharply, including that for Canada, and projects 4.7 percent growth in Canada this year, up from a December forecast of 3.5 percent, and projects 4.0 percent growth in 2022.

New Zealand holds policy but stimulus may be needed

    New Zealand's central bank left its benchmark interest rate and its current asset purchase program steady but added that "further monetary stimulus may be needed in order to achieve its remit objectives" as a "severe and prolonged economic downturn would make it difficult to achieve its inflation and employment objectives, and at the same time would pose a material risk to financial stability."

     The Reserve Bank of New Zealand (RBNZ), which last month expanded its asset purchase program for the second time to lower the interest rates for households and businesses, kept its Official Cash Rate (OCR) at 0.25 percent, unchanged since it was cut by 75 basis points in March.

     In August RBNZ raised its Large Scale Asset Purchase (LSAP) program to up to $100 billion from $60 billion and said it was actively preparing for additional monetary stimulus, such as a Funding for Lending Programme (FLP), a negative OCR and purchases of foreign assets.

     Although the recent outbreak of COVID-19 in New Zealand had now been contained and measures to contain the virus were being relaxed, the bank's monetary policy committee agreed the pandemic and travel restrictions could have a significant long-term negative effect on the economy, with lower potential growth, and the outlook for inflation and employment remains subdued.

      "There is substantial uncertainty about the future spread of COVID-19 both domestically and globally, and how economic, health and social activity will adapt," RBNZ said.

     While the contraction of gross domestic product in the second quarter of 12.2 percent from the first quarter was less than expected, it came after a 1.4 percent quarterly contraction in the first quarter, and the balance of risks to the economy remain to the downside.

     At its meeting, the policy committee had discussed the sequencing of how to deploy any additional stimulus, with bank staff advising that deploying FLP with rates near the OCR before the forward guidance period for OCR ends could provide additional stimulus to the economy sooner and this would also provide certainty to financial instituions and speed up the transmission of the programme.

     RBNZ added that members of the committee had agreed they preferred to launch and FLP before the end of 2020 and the banking system is on track to be operationally prepared for negative interest rates by year end.