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The Bank of Canada kept interest rates unchanged as expected at 0.25% on Thursday and recalibrate its purchase program. Analysts at the National Bank of Canada point the shift in QE was needed change to us it was proving too large for parts of the Canadian bond market. 

Key Quotes:

“The Bank’s recalibration of the QE program was a needed change to us as the GBPP was proving too large for parts of the Government of Canada bond market. The move to lower the weekly amount but increase the duration of purchases should deliver as much stimulus as before, as the Bank’s commitment to keep the policy rate at the effective lower bound should anchor front-end rates. Moreover, the $4 billion per week is still a very significant sum, easily outpacing other central banks as a share of population, GDP or total bonds outstanding.”

“As the statement highlights, the Bank doesn’t expect economic slack to be fully absorbed until sometime in 2023 suggesting that the earliest we could see rate normalization is two and half years out. We see this as a reasonable timeline but wouldn’t be surprised if the overnight rate remained at 0.25% into 2024 as well. As always, the progression of the pandemic will be in the driver’s seat here and ultimately dictate the health of the economy, and thus, monetary policy.”