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Governor of the Bank of Canada Tiff Macklem walks into the central bank's headdquarters in Ottawa on June 22, 2020.

Blair Gable/Reuters

The Bank of Canada left its key interest rate and other COVID-related market actions unchanged Wednesday, but opened the door to adjusting its government-bond-purchasing programs, amid a post-lockdown economic rebound that has been stronger than expected.

In the statement accompanying the central bank’s regularly scheduled rate decision, it reiterated the pledge in its previous rate decision from mid-July to leave its key rate unchanged at a record-low 0.25 per cent “until economic slack is absorbed so that the [bank’s] 2-per-cent inflation target is sustainably achieved.” It also repeated its July commitment to continue its large-scale purchases of government bonds “until the recovery is well under way,” in order to “keep interest rates low across the yield curve.”

But Wednesday’s statement went further on the bond-buying programs, saying the amounts the bank will purchase in future “will be calibrated to provide the monetary stimulus needed to support the recovery and achieve the inflation objective.” The bank had previously pledged to leave its purchase levels unchanged, at a minimum of $5-billion a week of federal government bonds.

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The bank noted that the economic recovery in the third quarter “looks faster than anticipated in July.” However, it said it still expects that “this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support.”

It said that inflation “is expected to remain far below target in the near term,” and added that its measures of core inflation – ranging from 1.3 to 1.9 per cent – indicate “the large degree of economic slack.”

“The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social-distancing measures required to contain its spread.”

The bank slashed its key rate from 1.75 per cent to the current record low of 0.25 per cent in a series of cuts in March, in response to the rapidly deepening economic impact of the pandemic. It also took numerous other actions in financial markets to shore up stability and provide urgently needed liquidity, including launching programs to buy federal and provincial government debt – the bank’s first venture into a monetary-policy strategy known as quantitative easing (QE).

But as the recovery has intensified and markets have strengthened, demand for many of the bank’s emergency measures has faded. In late July, the bank scaled back its purchases of short-term federal and provincial debt – new issues with a maturity of 12 months or less. The bank’s program to buy corporate bonds has all but disappeared, and use of its short-term liquidity facilities by financial institutions has also dried up.

Economists said the central bank’s talk of recalibrating its QE program doesn’t necessarily mean it is opening the door to reducing its size. However, they said the bank may be preparing to fine-tune its bond purchases as the recovery takes shape to steer longer-term bond yields lower in order to help keep the economy rolling.

“Should term rates move decisively higher, we could see a move to yield-curve control à la Japan and Australia, though we’d judge this to be premature at this juncture,” National Bank of Canada economists Taylor Schleich, Warren Lovely and Jocelyn Paquet said in a research note.

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But they acknowledged that financial-market participants will be looking for further information from the central bank in the coming months on just when it might look to scale back its QE program.

“As we move towards 2021, markets may look for better guidance on the bank’s Government of Canada bond purchases to clarity what the economic recovery being ‘well under way’ looks like in practice,” they said.

Bank of Montreal economist Benjamin Reitzes said the central bank’s comment about calibrating its purchases “suggests that the QE program will be the first policy tool tweaked if any changes are needed,” rather than looking to adjust the interest rate. Given that the central bank also reiterated that its key rate is at “the effective lower bound” – central bankers' language for what they consider to be the floor – he argued that the two statements taken together “should put any talk of negative rates fully to bed.”

The Bank of Canada has talked in the past about the theoretical possibility of taking its key rate below zero – something some central banks elsewhere have done, most notably the European Central Bank. However, during the current crisis, the bank has repeatedly played down the possibility, arguing that negative rates would be too disruptive to already fragile financial markets.

The central bank will shed further light on its policy stance Thursday, when Tiff Macklem, the bank’s recently installed governor, gives a speech via teleconference updating the bank’s economic outlook. The speech will be followed by a news conference.

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