Handover day at the Bank of Canada

In line with market expectations, the Bank of Canada kept its key overnight target rate unchanged at 0.25 percent today. The Governing Council meeting that made this decision was Stephen Poloz's final responsibility as the Bank's Governor; Tiff Macklem assumed that role today, and the press release notes that he participated as an observer in the rate decision and supports it.

The contents of the press release suggest that the job is not quite the poisoned chalice that it seemed just a few weeks ago, when Macklem was appointed. The Bank feels that the impact of the COVID-19 pandemic on the global economy "appears to have peaked, although uncertainty about how the recovery will unfold remains high."  Despite unprecedented policy measures, and even though financial market conditions and commodity prices have improved, it still expects that "the global recovery likely will be protracted and uneven."  

As for the domestic situation, "the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR). The level of real GDP in the first quarter was 2.1 percent lower than in the fourth quarter of 2019. This GDP reading is in the middle of the Bank’s April monitoring range and reflects the combined impact of falling oil prices and widespread shutdowns. The level of real GDP in the second quarter will likely show a further decline of 10-20 percent."  Consistent with its outlook for the global economy, the Bank expects that growth will resume in the third quarter of this year, although the outlook for the rest of 2020 and beyond is "heavily clouded".

While keeping its rate target unchanged, the Bank announced that it will be reducing the frequency of two of the emergency asset purchase programs it put in place to provide liquidity to financial markets. This reflects its view that short-term funding conditions have improved. Programs for the purchase of public sector and corporate debt will remain in place for now.

The Bank's next rate decision day is July 15, and an updated Monetary Policy Report is scheduled for release at the same time.  It is unlikely that Governor Macklem will make any significant policy shifts so early in his tenure: expect rates to remain at current levels for the rest of this year.