Monetary policy as the recovery progresses

Governor Tiff Macklem talks about the Bank of Canada’s decision yesterday to leave the policy rate unchanged. He also talks about how the Bank could adjust monetary policy once the economy needs less support.

Watch Governor Macklem speak to the Fédération des chambres de commerce du Québec via webcast. Read the full speech.

Our decision yesterday

We decided to leave the policy interest rate at 0.25 percent.

We also decided to maintain:

  • our commitment to hold the policy rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved
  • the target pace of our quantitative easing (QE) program at $2 billion per week

The recovery is progressing but choppy

Over the summer, as most Canadians got vaccinated and the third wave of the COVID‑19 pandemic receded, sectors such as tourism and hospitality finally saw customers return.

But the recovery is still choppy and, given the rise in infections in many areas, a lot of uncertainty remains.

  • Jobs have rebounded, but the recovery of the labour market is still uneven.
  • Growth from April through June was weaker than expected.
  • Consumption, business investment and government spending have continued to fuel the recovery. At the same time, housing activity appears to be moderating.
  • Supply chain bottlenecks have weighed on manufacturing and exports.

And inflation continues to be higher than before the pandemic. That’s mainly because inflation compares today’s prices with those of a year ago, when much of the economy was still locked down. But it’s also due to supply disruptions that are leading to higher prices for motor vehicles and other goods.

Against this background and the considerable excess capacity in the economy, the Governing Council judged that the recovery continues to require extraordinary monetary policy support.

Bond purchases have helped the recovery

A key part of the Bank’s contribution to the recovery was its large purchases of Government of Canada bonds through our QE program.

QE helps stimulate the economy by lowering borrowing costs for households, businesses and governments. When the Bank buys large quantities of Government of Canada bonds, it not only expands the Bank's balance sheet but also reduces the interest rate on the bonds.

That, in turn, helps keep a range of other lending rates in the economy lower.

Since October 2020, we’ve been gradually reducing the pace of our QE purchases as the economy recovers. When we started the program in July 2020, we were buying at least $5 billion of the bonds each week. Currently, our weekly target for the purchases is $2 billion.

We are still adding stimulus each week through QE, just at a slower pace.

As the recovery progresses, we are moving closer to a time when continuing to add stimulus through QE will no longer be necessary.”

Work will continue after QE ends

Once we no longer need to add new stimulus through QE, we’ll stop increasing the size of our holdings of Government of Canada bonds.

A lot of monetary stimulus will remain in the system—and the economy will still need it. So, to keep our bond holdings relatively stable, we’ll need to buy enough bonds to replace those that are maturing.

Essentially, we will be reinvesting the proceeds of maturities, so we call this the reinvestment phase.

Eventually, when we need to start reducing the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate. That means it is reasonable to expect that when we reach the reinvestment phase, we will remain there for a period of time, at least until we raise the policy interest rate.

But, ultimately, when we arrive at the reinvestment phase and how long we stay there will depend on the strength of the recovery and how inflation evolves.

Our commitment is to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve our 2 percent inflation target. And you can count on us to continue to be transparent.”