Quick take

Bank of Canada tapers bond purchases while expecting inflation to remain elevated in the short-term

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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 announcement and its updated Monetary Policy Report:

Today’s announcement from the Bank of Canada reflects its confidence in the strength of the Canadian economy. Holding policy interest rate steady at 0.25 per cent, while reducing weekly net purchases of federal bonds by $1 billion, is an important step in our economic recovery. We anticipate CPI inflation to remain at or above 3 per cent before easing towards 2 per cent next year, while the Bank is expected to keep interest rates steady until the 2 per cent inflation target is sustainably achieved

Insights:

  • Today’s release supports our forecast, that interest rates will remain rock bottom beyond the short-term.
  • We anticipate that Canada’s real GDP will reach its pre-pandemic level by the end of 2021, but the Bank will hold its policy rate steady until the second half of 2022.
  • We expect upward pressure on oil prices to continue over the summer as recovery in demand will most likely outpace supply.
  • While inflation is expected to remain at or above the 3 per cent range throughout the remainder of this year – as a result of higher gasoline prices, supply disruptions, and a faster than expected recovery in certain service industries – we believe that if recent spikes in inflation turns out to be ongoing, the Bank may be forced to raise short-term rates sooner than expected.
  • In addition, the Canadian dollar continues to hover around the 80 cents US mark, close to its average over the past several months. We expect the Canadian dollar to trade around the same mark in the medium term.
  • Overall, the economy is projected to grow around 6 per cent in 2021 before moderating to 4.5 in 2022, which is in line with our latest national forecast of 6.7 per cent growth this year followed by 4.4 per cent in 2022.

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Sasan Fouladirad

Sasan Fouladirad

Economist

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