BOC keeps Interest Rate Unchanged At 0.25%

The Bank of Canada has announced that the domestic economy will grow at a slightly slower pace this year than it previously thought and expects the risks from COVID-19 to wane – but not enough to change its trendsetting policy rate.

The central bank said it expects the economy to grow 6.0 per cent in 2021, down from its previous forecast of 6.5 per cent. However, the bank now expects growth of 4.6 per cent in 2022, up from its earlier forecast of 3.7 per cent.

The reason for the shift is a weaker first half of the year than the bank expected as the economy was hampered by lockdowns and restrictions.

“A year ago, at the time of my first MPR as Governor, the economy was in a very deep hole. We were just coming out of the first wave of the virus, more than two million Canadians were unemployed, and inflation was well below our 1 to 3 percent target range. Uncertainty was extremely high. Vaccines were being developed, but nobody knew when they would be available or even if they would prove effective,” Governor, Tiff Macklem, said in the opening statement.

“Since then, a lot has happened. We have endured two more waves of the virus, and this has held back recovery. But thanks to the resilience and ingenuity of Canadian households and businesses, and exceptional fiscal and monetary policy support, the economy has continued to grow. It has been choppy and very uneven, and everyone has had to cope with a lot of uncertainty. But the economy has proven to be impressively resilient. And now highly effective vaccines have arrived.

“With cases falling, rapid progress on vaccinations and easing containment measures, the Governing Council is increasingly confident that growth will rebound strongly as the economy once again reopens, and this time growth will be more durable.

Second, as the unique circumstances created by the pandemic continue to evolve, there is a continued need for careful attention to the dynamics of the recovery and inflation. Globally, the economic outlook remains highly dependent on the course of the virus and new variants are a concern. In Canada, we still have some way to go to a complete recovery, and the rebound in economic activity will proceed at different speeds across sectors. The process of reopening the economy won’t be entirely smooth. For example, we are experiencing supply bottlenecks for some goods and services as demand rebounds faster than supply can ramp back up. These unique circumstances of the pandemic are now helping to push inflation temporarily above our target band,” he said.

“As we reopen the economy, we expect to see some volatility, and we will continue to pay close attention to the progress of the recovery and to the evolution of inflation,” he added.

The governor said that the global economy is recovering strongly, but vaccination rates and growth are uneven across advanced and emerging-market economies, noting that the growth is particularly strong in the United States, which is further ahead in its reopening and benefitting from substantial fiscal stimulus. Oil prices have moved higher with stronger global demand, while other commodity prices remain elevated. The Canadian dollar is close to where it was in April relative to the US dollar, but it is slightly stronger against a broader basket of currencies.

As a result, the bank kept its key policy rate on hold at 0.25 per cent on Wednesday, where it has been since the onset of the pandemic. The bank said it will keep the rate at near-zero until the economy is ready to handle an increase in rates, which it doesn’t expect to happen until the second half of 2022.

 

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