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Optimistic Bank of Canada holds rates steady, reinforces commitment to support

Bank of Canada engraved into a stone wall.

The Bank of Canada (BoC) today held the line on interest rates, maintaining its target for the overnight rate at 0.25%. The BoC also reaffirmed its commitment to keeping the policy interest rate near zero until the economy is running at full capacity and the 2% target for inflation can be sustainably achieved. 

Vaccines to the rescue 

Despite keeping rates at historic lows, there was plenty of optimism in today’s announcement driven mainly by the arrival of effective vaccines in Canada and around the world. 

The Bank increased its projection for global growth to just over 5% in 2021 and just below in 2022 followed by a slowdown to just under 4% in 2023. Such improved prospects are a direct result of vaccines having been made available earlier than expected and have contributed to a positive reaction in both financial markets and commodity prices with the Canadian dollar getting a boost from stronger commodity prices and a decline in the U.S. dollar. 

Lockdowns temper Q1 growth in Canada 

While widespread vaccination will no doubt save lives and livelihoods as the economy reopens, heightened uncertainty remains around the path of the virus and the timeline for the effective rollout of vaccines.  

While the Canadian economy experienced strong momentum through to late 2020, a resurgence of the virus and new lockdown measures have been a major setback and the BoC now expects negative growth for the first quarter of 2021.

The prospect of restrictions being lifted, however, lays the groundwork for a strong rebound in the second quarter of this year as the economy reopens and confidence improves. The Bank now forecasts increasing consumption and a bump in exports business investment due to rising foreign demand. 

The Canadian economy is projected to grow by 4% in 2021, nearly 5% in 2022, and 2.5% in 2023 - that following a decline in real GDP of 5.5% in 2020. 

Committed to accommodative policy

Despite its optimism, the Bank reinforced its commitment to strong forward guidance by stating that extraordinary monetary policy will remain until its inflation target can be sustainably achieved. This means its key lending rate will remain extraordinarily low until the current economic slack is absorbed and the 2% inflation target can be achieved sustainably, likely in 2023. Additional stimulus via quantitative easing or the BoC’s asset purchase program will continue to provide required support until the economic recovery is considered underway.

For now, CPI inflation is forecast to rise temporarily in the first half of 2020 as the economy shakes off the effects of price declines at the outset of the pandemic, particularly gasoline; however, core inflation is expected to remain subdued.

Although the Bank’s economic outlook is more positive than previous updates, there were no surprises included in the announcement. Our portfolio positioning is unchanged, and we continue to believe that policy makers will provide unprecedented support for the global economy with equities continuing to outperform fixed income amid the very low interest rate environment.

The next BoC interest rate announcement is scheduled for March 10, 2021.

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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