Bank of Canada Interest Rate Announcement
The Bank of Canada maintained its overnight rate at 0.25 per cent this morning, a level it considers its effective lower bound. The Bank reiterated what it calls "extraordinary forward guidance" in committing to leaving the overnight rate at 0.25 per cent until slack in the economy is absorbed and inflation sustainably returns to its 2 per cent target. The Bank projects that will not occur until 2023. The Bank is also continuing its quantitative easing (QE) program, purchasing at least $4 billion of Government of Canada bonds per week. In the statement accompanying the decision, the Bank noted that the economic recovery has been interrupted by the second wave of COVID-19, but the arrival of effective vaccines has boosted the medium-term outlook for economic growth. The Bank expects the Canadian economy will grow 4 per cent in 2021 and 5 per cent in 2022.
The restrictions in place to mitigate the impact of the second wave of COVID-19 mean that the economy is likely going to get off to a slow start in 2021. However, as vaccinations accelerate in coming months, the Canadian economic recovery will gain steam in the second half of 2021. Depending on the strength of the recovery, we may see the Bank taper its purchases of government bonds in 2022, which could put moderate upward pressure on 5-year fixed mortgage rates. However, that still means the current extremely low interest rate environment will be around for quite some time.
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