Official Statement from the Bank of Canada
On June 9, 2021, the Bank of Canada made a crucial decision regarding its interest rate. In this article, we will delve into the details of their announcement and explore the implications for the Canadian economy.
Bank of Canada Holds Overnight Rate at Effective Lower Bound
The Bank of Canada has decided to maintain its target for the overnight rate at 0.25 per cent, with the Bank Rate at 0.5 per cent and the deposit rate at 0.25 per cent. This decision is a continuation of their previous stance, where they have been holding rates low to support economic recovery.
Quantitative Easing (QE) Program Continues
The Bank’s quantitative easing program will continue at a target pace of $3 billion per week. This program aims to stimulate the economy by purchasing government bonds and keeping interest rates low. By doing so, the Bank is providing additional monetary policy support to help the Canadian economy recover from the COVID-19 pandemic.
Economic Developments
The Canadian economy has been broadly in line with the outlook presented in the April Monetary Policy Report (MPR). Despite a strong first quarter GDP growth of 5.6 per cent, which was lower than expected, the underlying details indicate rising confidence and resilient demand. Household spending was stronger than anticipated, while businesses drew down inventories and increased imports more than forecasted.
Renewed Lockdowns Affect Second Quarter
The recent resurgence of COVID-19 cases in Canada has led to renewed lockdowns, which are dampening economic activity in the second quarter. This is largely as anticipated, with workers in contact-sensitive sectors being most affected by job losses. The employment rate remains below its pre-pandemic level, with low-wage workers, youth, and women continuing to bear the brunt of job losses.
Forecast for Canadian Economy
With vaccinations proceeding at a faster pace and provincial containment restrictions easing over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending. Housing market activity is anticipated to moderate but remain elevated, while strong growth in foreign demand and higher commodity prices should lead to a solid recovery in exports and business investment.
Uncertainty Remains
Despite progress on vaccinations, there continues to be uncertainty about the evolution of new COVID-19 variants. More broadly, the risks to the inflation outlook identified in the April MPR remain relevant.
Inflation Outlook
CPI inflation has risen to around 3 per cent due largely to base-year effects and stronger gasoline prices. Core measures of inflation have also increased but by much less than CPI inflation. While CPI inflation is expected to remain near 3 per cent through the summer, it is anticipated to ease later in the year as base-year effects diminish and excess capacity continues to exert downward pressure.
Monetary Policy Support
The Governing Council judges that there remains considerable excess capacity in the Canadian economy and that the recovery requires extraordinary monetary policy support. The Bank will continue its QE program to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding adjustments to the pace of net bond purchases will be guided by the Governing Council’s ongoing assessment of the strength and durability of the recovery.
Conclusion
The Bank of Canada’s decision to maintain its interest rate at the effective lower bound is a continuation of their previous stance aimed at supporting economic recovery. The Canadian economy is expected to rebound strongly, led by consumer spending, housing market activity, exports, and business investment. However, uncertainty remains about the evolution of new COVID-19 variants and the risks to the inflation outlook.
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