As we approach the one-year anniversary of the Bank of Canada (BoC) cutting its target for the overnight rate to 0.25% at the beginning of the pandemic, the Bank announced this week that it will keep the rate unchanged. Additionally, the BoC will continue on with its quantitative easing program by purchasing at least $4 billion of securities per week.
There is much to be optimistic about
In Canada, GDP grew by 9.6% in the fourth quarter of 2020 and the BoC now projects positive growth for the first quarter of 2021 (In January, the Bank was expecting a contraction). Consumers and businesses have done a good job in adapting, with the Bank noting that “the economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures.”
Furthermore, the housing market has been stronger than expected and improving foreign demand along with higher commodity prices have given a boost to exports and business investment.
Regarding the global economy, the recovery is proceeding but the pace remains uneven across regions and sectors. In the U.S., fewer virus infections and more fiscal stimulus is fueling momentum in its recovery. The BoC acknowledged the recent spike in bond yields, but reiterated that global financial conditions remain highly accommodative.
But there’s ample room for improvement
The way the pandemic plays out continues to be the largest risk to the recovery as we contend with more transmissible variants of the virus, localized outbreaks and ongoing countermeasures. The Bank stated, “despite the stronger near-term outlook, there is still considerable economic slack and a great deal of uncertainty about the evolution of the virus and the path of economic growth.” Moreover, employment is lagging pre-pandemic levels.
Staying supportive for the foreseeable future
The BoC ended its announcement by restating that it believes the economy continues to need “extraordinary monetary policy support” and that it will continue to provide the appropriate level of policy stimulus via low interest rates and quantitative easing until the economic slack is absorbed and its 2% inflation target is sustainably achieved. According to the Bank’s January projections, this is likely to endure into 2023.
As this month’s announcement was broadly in-line with our expectations, no material changes to our strategy are currently required.
The next BoC interest rate announcement is scheduled for April 21, 2021 and it will be accompanied by the latest Monetary Policy Report (updated outlook and projections).
If you have any questions or require more information, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.