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Bank of Canada: Target rate to stay put until later in 2022

The Bank of Canada (BoC) today kept its key interest rate unchanged and reiterated its commitment to keeping the policy rate low until the second half of 2022.

With the target overnight rate steady at 0.25%, the BoC continues to keep a close eye on the economy and inflation while maintaining its quantitative easing program (asset purchases) at $3 billion a week. Remember, the BoC reduced this amount from $4 billion per week in April’s announcement.

All eyes on variants and vaccines

The path of the pandemic remains of paramount concern. Globally, the pace of COVID-19 vaccination has been uneven and new variants of the virus continue to worry the BoC. And while Canada saw robust economic growth in the first quarter of the year, a third wave and new lockdowns dampened growth in the second. Employment also remains well below its pre-pandemic level.

Economy to power ahead

There are however plenty of signs that better economic times lie ahead – the BoC expects a strong rebound in the Canadian economy over the summer as vaccinations move forward quickly and provincial restrictions are eased. The housing market is also set to grow, although it remains elevated, and a combination of foreign demand and higher commodity prices will drive a solid recovery in exports and business investment.

Where to from here?

The BoC has no plans to raise rates or cut bond buying further until its 2% inflation target is sustainably achieved. That, says the BoC, likely won't be until later in 2022. It’s important to note that CPI inflation is currently around 3%, but the BoC sees that as transitory and largely caused by the recent lows we are coming off of (the base year effect). The Bank expects this to ease after the summer as the base year effect wears off and excess capacity is utilized.

How are we responding?

Our portfolios continue to be positioned with an overweight allocation to equities. Risk assets are well supported by strong financial conditions and are expected to outperform.

From a fixed income perspective, we are modestly short duration with a continued expectation that the middle of the yield curve across developed market economies will gradually increase to moderately higher rates.

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.

About the Author

Wesley Blight, CFA, CIM, FCSI, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He is responsible for the investment results of the firm’s fixed income and multi-asset products.

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