Breaking: BoC leaves policy rate unchanged, reduces weekly asset purchases to C$2 billion

The Bank of Canada (BoC) announced on Wednesday that it left its key rate unchanged at 0.25% following the July policy meeting as expected. However, the BoC decided to reduce the target of weekly net asset purchases of the government of Canada bonds to C$2 billion from C$3 billion.

Market reaction

The USD/CAD pair dropped to a daily low of 1.2434 with the initial reaction but managed to stage a rebound. As of writing, the pair was down 0.15% on the day at 1.2494.

Key takeaways from policy statement as summarized by Reuters

"QE adjustment reflects continued progress towards recovery and the bank’s increased confidence in the strength of the Canadian economic outlook."

"Governing Council judges that the Canadian economy still has considerable excess capacity and that the recovery continues to require extraordinary monetary policy support."

"Recent spread of new COVID-19 variants is a growing concern, especially for regions where vaccinations rates remain low."

"The factors pushing up inflation are transitory, but their persistence and magnitude are uncertain and will be monitored closely."

"Q3 growth should pick up strongly after H1 fell short of projections, inflation will likely stay at or above 3% for rest of 2021."

"Economic slack will be absorbed some time in H2 2022, unchanged from April MPR."

"Downside risks associated with pandemic have significantly diminished but achieving a full and inclusive recovery will take time."

"BoC projects 2021 Canada GDP +6.0% vs +6.5% in April MPR, 2022 +4.6% (vs +3.7%) and 2023 +3.3% (vs +3.2%)."

"2021 Q1 annualized GDP was +5.6% (vs +7.0% in April MPR), Q2 annualized GDP seen +2.0% (vs +3.5%), q3 annualized GDP seen +7.3%."

"Projections show level of real GDP will be about 0.75% higher by the end of both 2022 and 2023 compared to April MPR forecast."

"As effects of temporary factors fade later in 2021 and in 2022, inflation will ease to about 2%; it will then rise temporarily to modestly above 2% in 2023 before returning toward the target in 2024."

"Overall Canada 2022 inflation seen at 2.4% vs 1.9% in April MPR, in 2023 seen at 2.2% (vs 2.3%)."

"Economic recovery expected to become more broad-based and self-sustaining over the projection horizon; says significant labor market slack currently remains."

"Housing activity is anticipated to remain higher than it was before pandemic; rebalancing of supply and demand will lead to moderation in house price growth over the projection horizon."

"Potential output growth seen averaging about 1.8% per year over 2021-23, up 0.2 percentage points from April MPR."

"Strong growth in foreign demand and higher commodity prices should contribute to a solid pickup in exports and business investment."