Quick Take

New year, same policy interest rate

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The Conference Board of Canada’s senior economist, Richard Forbes, offers the following insights on today's Bank of Canada interest rate decision:

The Bank of Canada held its policy interest rate steady and announced that it will continue with its quantitative easing program. With core inflation well below its target of two per cent, and a slowdown in the economic recovery over the past few months, today’s announcement was expected. Looking ahead, the central bank is likely to remain on the sidelines in terms of interest rate hikes until 2023.

  • The Bank of Canada held its target for the overnight rate steady at 0.25 per cent, recognizing that there is still a long road ahead for the Canadian economy to fully recover from the pandemic.
  • With the loonie trading near its highest level in three years, and a slowdown in the economic recovery over the past few months, the Bank of Canada recently noted that it could reassess its effective lower bound of 0.25 per cent. However, that is unlikely as economic prospects have recently improved due to a sooner-than-anticipated rollout of COVID-19 vaccines globally.
  • In addition to the interest rate announcement, the central bank stated that it will continue its quantitative easing program, whereby it purchases a minimum of $4 billion per week of federal government bonds.
  • CPI inflation has risen to the low end of the Bank of Canada’s one per cent to three per cent target range over the past few months. Measures of core inflation—which exclude food and energy prices—remain below the bank’s annual target of two per cent.
  • The Bank of Canada reiterated that the policy rate will remain at its effective lower bound of 0.25 per cent until a two per cent inflation target is sustainably achieved, something it does not anticipate will happen until 2023.
  • While the first quarter of 2021 is likely to be a dire one for the Canadian economy because of stringent lockdown measures around the country, the bank expects growth to pick-up sharply in the second half of 2021. That is in line with our latest national forecast, which is contingent on the widespread distribution of an effective COVID-19 vaccine by the fall of this year.
  • Today’s release supports our forecast that interest rates will remain rock bottom beyond the short-term. We anticipate that real gross domestic product (GDP) will reach its pre-pandemic level by the end of 2021, but the central bank will hold its policy interest rate at 0.25 per cent until 2023.

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Richard Forbes

Richard Forbes

Senior Economist

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