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Bank of Canada holds rates steady while making cuts to its quantitative easing program

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The Conference Board of Canada’s Economist Sasan Fouladirad offers the following insights on today's Bank of Canada interest rate decision and release of its latest Monetary Policy Report:

Despite a stronger than expected economic performance in the first quarter of 2021, the Bank of Canada held its policy interest rate steady and announced that its weekly net purchases of Government of Canada bonds will be reduced to a target of $3 billion. CPI inflation is expected to temporarily rise to near the top of the 1–3 per cent target range before easing back towards 2 per cent in the second half of 2021. Looking ahead, the central bank is likely to remain on the sidelines in terms of interest rate hikes until the second half of 2022.

  • The Bank of Canada held its target for its overnight interest rate steady at 0.25 per cent today, recognizing that, although the economic outlook has been improving, it still has challenges ahead to fully recover from the pandemic.
  • In addition to its interest rate announcement, the Bank released its updated Monetary Policy Report, which showed a brighter outlook for the Canadian and global economies than in January.
  • In response to the improved economic outlook, the central bank stated that it will make a $1 billion cut to its quantitative easing program. This means that the Bank will be purchasing a minimum of $3 billion of federal government bonds per week rather than $4 billion.
  • Stronger than expected global economic growth has led to a rise in commodity prices, including oil. These factors contributed to the strengthening of the Canadian dollar over the past few months.
  • CPI inflation is expected to rise to near the top of the 1–3 per cent target range over the next few months due to higher prices for many consumer goods and services, as well as higher oil prices. The Bank expects this rise to be temporary and ease back towards the 2 per cent range over the second half of 2021.
  • The Bank restated today that the policy rate will remain at its effective lower bound of 0.25 per cent until a 2 per cent inflation target is sustainably achieved, which is not anticipated to happen until the second half of 2022 at the earliest.
  • Economic performance in the first quarter of 2021 was considerably stronger than anticipated as households and businesses have adapted to the second (and subsequently third) wave of the pandemic.
  • As vaccines continue to roll out and restrictions are eventually lifted, the Bank projects economic growth to pick up even more in the second half of the year. Heightened commodity prices and additional fiscal stimulus announced in the federal budget a few days ago are giving an extra boost to this projection.
  • Today’s release is in line with our latest national forecast which anticipates that economic growth in the Canadian economy will accelerate in the second half of this year, while interest rates will remain rock bottom for the foreseeable future.
  • We anticipate that national real GDP will reach its pre-pandemic level by the end of 2021. However, that is contingent on the widespread distribution of effective COVID-19 vaccines by the fall of this year.

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Sasan Fouladirad

Sasan Fouladirad

Economist

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