Bank of Canada maintains key rate and forecasts, adjusts quantitative easing program

The Bank of Canada today kept its target for the overnight rate at the lower effective limit of ¼ per cent, with the bank rate at ½ per cent and the deposit rate at ¼ per cent. The Bank maintains its extraordinary forward-looking orientation on the overnight rate trajectory. This is reinforced and complemented by the Bank’s quantitative easing (QE) program, which is adjusted at a target rate of $ 2 billion per week. This adjustment reflects the continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.

The global economy is recovering strongly from the COVID-19 pandemic, with continued progress in immunization, especially in advanced economies. However, the recovery is still very uneven and remains dependent on the evolution of the virus. The recent spread of new variants of COVID-19 is a growing concern, especially for regions where vaccination rates remain low.

Global GDP growth is expected to reach 7% this year, then moderate to around 4 ½% in 2022 and just over 3% in 2023. This is a slightly stronger forecast than the Policy Report. The Bank’s April Monetary (RPM) and primarily reflects a stronger US outlook. Global financial conditions remain very accommodating. Rising demand is supporting rising oil prices, while non-energy commodity prices remain high. The Canada-U.S. Exchange rate has changed little since April.

In Canada, the third wave of the virus slowed growth in the second quarter. However, the decline in COVID-19 cases, advances in vaccinations and the easing of containment restrictions all indicate a strong recovery in the second half of this year. The Bank now expects GDP growth of around 6% in 2021 – a little slower than expected in April – but has revised its forecast for 2022 upwards to 4 ½% and forecasts growth of 3 ¼% in 2023.

Consumption is expected to lead the recovery as households return to more normal spending habits, while activity in the housing market is expected to retreat from historic highs. Strengthening international demand should support a solid recovery in exports. As domestic and foreign demand increases and confidence improves, business investment strengthens. Employment has started to rebound again and we expect the hardest hit segments of the labor market to post solid gains as the economy reopens. However, the pace of the recovery will vary across industries and workers, and it may take some time to hire workers with the right skills to fill the positions. The consequences of the lockdowns and the ongoing structural changes in the economy both mean that estimates of potential output and when the output gap will close are particularly uncertain.

CPI inflation was 3.6% in May, boosted by temporary factors that include base year effects and higher gasoline prices, as well as bottlenecks related to the pandemic when economies reopen. Basic measures of inflation also rose, but less than the CPI. In some high-contact services, demand bounces faster than supply, pushing prices up from low levels. Transient supply constraints in shipping and disruptions in the semiconductor value chain also translate into higher prices for cars and some other goods. With higher gasoline prices and persistent bottlenecks, inflation is expected to remain above 3% in the second half of this year and return to 2% in 2022, as short-term imbalances are declining and as the considerable overall slowdown in the economy is pulling inflation lower. The factors driving inflation are transitory, but their persistence and magnitude are uncertain and will be closely monitored.

The Governing Council considers that the Canadian economy still has considerable excess capacity and that the recovery continues to require extraordinary monetary policy support. We remain committed to keeping the key interest rate at the effective lower limit until the economic downturn is absorbed so that the 2% inflation target can be reached on a sustainable basis. In the Bank’s July projection, this will happen in the second half of 2022. The Bank’s quantitative easing program continues to strengthen this commitment and keep interest rates low across the yield curve. Decisions on further adjustments to the pace of net bond purchases will be guided by the Governing Council’s ongoing assessment of the strength and sustainability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and meet the inflation target.

Information note

The next scheduled date for the announcement of the target for the overnight rate is September 8, 2021. The next full update of the Bank’s economic and inflation outlook, including risks to the projection, will be posted in the RPM on October 27, 2021.

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