Bank of Canada holds rate steady at 0.25% even as it expects economy to shrink until March
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The Bank of Canada elected to keep its benchmark interest rate steady at 0.25 per cent on Wednesday, reiterating its pledge to keep it there “until the recovery is well underway.”
Eight times a year, Canada’s central bank meets to set its benchmark interest rate, known as the target for the overnight rate, which impacts the rates that Canadians get on things like mortgages and savings accounts at banks.
All things being equal, the bank slashes its rate when it wants to stimulate borrowing and investing and raises it when it wants to cool things down.
The bank slashed its rate a number of times starting in March of last year, as the COVID-19 pandemic was just starting.
There had been some speculation prior to Wednesday that the bank may decide to cut again from its current level of 0.25 per cent, as virus numbers have been moving higher for several weeks now.
But in a statement, the bank said it’s going to stay the course for now.
“Canada’s economy had strong momentum through to late 2020, but the resurgence of cases and the reintroduction of lockdown measures are a serious setback,” the bank said.
“Growth in the first quarter of 2021 is now expected to be negative,” the bank said, forecasting that GDP will shrink by another 2.5 per cent in the first quarter of 2021, compared to where it was at the end of December. This comes after the economy already shrank by 5.5 per cent last year.
The short term looks gloomier than it did a few months ago, but the bank said it still thinks the deployment of vaccines this year will help power a strong bounceback for the economy. The bank thinks the economy will grow by four per cent for 2021 as a whole, and by another 4.8 next year.
“The outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus,” the bank said.
No change to QE program for now
The bank decided not to cut its rate, and it also elected to keep its bond-buying program unchanged at $4 billion a week.
The bond-buying program, known as quantitative easing, is another tool at the bank’s disposal that allows it to stimulate the economy because by buying up government bonds, the bank is lowering interest rates even more — putting more cash into the system that’s available to be spent.
While it says it won’t be scaling back those bond buys for now, slowing that pace of buying is clearly on the table.
We’re moving in the wrong direction right now, so the hole is going to be a little bit deeper.– Tiff Macklem on Canada’s economy
“We’re going to need this program for some time,” Bank of Canada Governor Tiff Macklem said in a press release to discuss the bank’s quarterly Monetary Policy Report.
Many economists have been suggesting the bank needs to start tapering those purchases back, simply because the impact is so large on the overall market.
Economist Taylor Schleich with National Bank noted in a report last week that at its current pace of bond buying, the central bank is on track to own half of all Canadian government bonds by the end of the year. “Our bond market simply isn’t large enough to accommodate such a significant absorption of bonds from the central bank,” Schleich said.
Macklem left the door open to slowing those purchases at some point. But the expectation that the economy is still shrinking suggests that won’t be happening any time soon.
“We’re moving in the wrong direction right now, so the hole is going to be a little bit deeper, [so] there’s farther to climb back from.”
But, he said, “as we gain confidence in in the strength of our recovery, we will begin to adjust our QE purchases.”
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SOURCE NEWS