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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 near the third quarter of 2022.  Of note, the Bank is ending its quantitative easing program of bond purchases and moving into what it terms the reinvestment phase where its Government of Canada bond purchases will be made solely to replace currently maturing bonds. In its statement, the Bank noted that growth in Canada is robust and it expects the economy will grow 5 per cent this year and 4.5 per cent in 2022.  However, shortages of manufacturing inputs and labour are limiting the economy's productive capacity in the short-term, leading to upward pressure on consumer prices. As a result, the Bank expects inflation to remain elevated into next year.

The Bank is currently challenged by the highly abnormal circumstance of an economy that is in many ways booming, from retail spending to the housing market, but one that is also suffering through significant supply side shocks from overwhelmed ports, global factory shutdowns and labour market shortages. The optimal monetary policy for the current environment is far from clear. The Bank's current timetable suggests a rate increase near the end of 2022, but we expect the Bank to take a cautious approach over the next year, carefully watching for signs that elevated inflation is becoming more persistent.
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