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Bank of Canada adds to QE flexibility, housing starts hit 13-year record

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By Julie Gordon and Fergal Smith

OTTAWA/TORONTO (Reuters) – The Bank of Canada held its key overnight interest rate steady on Wednesday but left the door open on possible future changes to bond buying, while a 13-year high for Canadian housing starts added to evidence of economic recovery.

Canada’s central bank said in a statement that the third-quarter rebound was looking to be faster than anticipated, though it noted that as the economy moves from the recovery to recuperation phase of the COVID-19 pandemic, it will continue to require extraordinary monetary policy support.

The Bank of Canada said it will continue its large-scale asset purchases at their current pace, but tweaked the language to say the program will be “calibrated” to provide the necessary stimulus needed to support the recovery.

Analysts said this suggests the bank will tweak its quantitative (QE) program if more or less stimulus is needed, rather than make changes to interest rates.

“The new language is a bit more balanced but I don’t think they’re teeing up for an imminent change in asset purchases,” said Josh Nye, senior economist at RBC Economics.

“While the bank noted the early recovery has been stronger than expected, they tempered any enthusiasm by noting the recuperation phase is still likely to be ‘slow and choppy,'” he added.

The Canadian dollar was trading 0.6% higher at 1.3158 to the greenback, or 76.00 U.S. cents, with the loonie extending its recovery from an earlier three-week low at 1.3259 after the BoC announcement, as stocks and oil prices rose. [MKTS/GLOB]

The central bank also noted that government programs to replace incomes and subsidize wages have been supporting economic activity.

Canada will this month start to transition people off its main COVID-19 emergency income support program and onto traditional unemployment benefits, which critics say will leave some Canadians with less money.

BoC Governor Tiff Macklem will give a speech on the uneven effects of COVID-19 on Thursday.

The central bank said that both the global and Canadian economies are evolving broadly in line with the scenario it set out in July, but noted a stronger than expected rebound in the United States, Canada’s largest trading partner.

Analysts said the decision to keep rates at 0.25% and the statement were broadly in line with expectations. The BoC will next update its outlook for the economy in late October.

“No changes to policy and no real surprises and we will just see what will happen in October,” said Andrew Kelvin, chief Canada strategist at TD Securities.

Canada’s pace of housing starts, meanwhile, jumped to 262,396 units from 245,425 units in July, the Canadian Mortgage and Housing Corporation (CMHC) said, easily beating analyst expectations of 220,000 units.

Analysts said some of the momentum is still catch-up from delays caused by COVID-19 and warned cracks could be coming.

“The fact that so much of the recent strength has been focused in the multi-unit sector presents a risk,” said Royce Mendes, senior economist at CIBC Economics, in a note, noting housing demand from immigration and students has waned.

Bank of Canada adds to QE flexibility, housing starts hit 13-year record

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