As long as it takes

At today's Governing Council meeting, the Bank of Canada kept its target interest rate unchanged at 0.25 percent, and pledged to keep monetary policy stimulative "until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved".  Despite encouraging signs of a rebound in the economy since the middle of the third quarter, it is clear that the Bank is prepared to maintain its current policy stance for an indefinite period.

Building on the recovery that began in Q2, the Bank believes that domestically, "the bounce-back in activity in the third quarter looks to be faster than anticipated in July".  It also notes that "The rebound in the United States has been stronger than expected."  However, it cautions that it expects "this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support".  This is in line with the view already expressed on this blog and elsewhere, that the easy part of the recovery from coronavirus lockdowns may already be largely behind us: going forward, progress will be much slower as the extent of structural damage to the economy becomes more evident. 

The Bank sees very little reason for concern about inflation: "CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth".  It is worth remembering, however, that the Bank recently expressed concern that existing inflation measures might be unreliable in current circumstances, with much of the general public believing that actual inflation is significantly higher than the official data suggest. This seemed to set the stage for some tweaks to the Bank's approach in the coming months, though there is no reference to this in today's release. 

In addition to committing to keep its target rate low until the economy returns to full capacity, the Bank pledges to continue "its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective".  Two weeks from now, the Government is expected to table a Throne Speech that will pledge long-term fiscal stimulus to promote the recovery of the economy.  There are already cries of alarm from conservative quarters (see this panicky screed from a former Finance Minister), but in current circumstances, it's hard to imagine that Canada will prove to be an outlier in pulling out all the stops to get its economy back on track.