Quick take

Bank of Canada holds rates steady ahead of the federal election

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  • The Bank of Canada (BoC) held its overnight rate at the effective lower bound of 0.25 per cent. The Bank Rate remained at 0.5 per cent while the deposit rate was also unchanged at 0.25 per cent.
  • Under its Quantitative Easing (QE) program, BoC’s asset purchases will remain at $2 billion per week.
  • There was no change to the Bank’s forward guidance. The policy interest rate is likely to remain at its effective lower bound until economic slack is absorbed and the 2 per cent inflation target is sustainability achieved. According to BoC’s latest projections, the first interest rate hike is expected to happen in the second half of 2022.
  • The Bank still expects the economy to strengthen in the second half of 2021, but the latest pandemic wave and supply chain disruptions could weigh on the recovery.
  • The Governing Council believes that the economy has considerable excess capacity and requires extraordinary monetary policy support.

Key implications:

  • No surprises. With less than two weeks to the federal election, the BoC kept rates steady. Weak economic growth, lingering challenges to the labour market, and uncertainty surrounding the pandemic mean that the economy still needs substantial monetary policy support.
  • The BoC may be forced to delay any further tapering of asset purchases if labour market data for July and August surprise on the downside. Going forward, weaker than expected data may also cause the Bank to postpone its first interest rate hike beyond the second half of 2022.
  • There is no doubt that transitory forces are lifting inflation. Still, the persistence and magnitude of these forces remain uncertain. The BoC currently projects inflation to remain above 3 per cent for the rest of the year before returning closer to the 2 per cent target in 2022. But higher than expected inflation over the next few months could force the Bank to change course sooner than planned. Findings from the BoC’s review of its mandate will tell Canadians more about the Bank’s tolerance for higher inflation going forward.

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