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Bank of Canada keeps benchmark rate at record low but economic outlook brightens

The Bank of Canada opted to keep its benchmark interest rate steady at a record-low 0.25 per cent Wednesday, saying the pandemic recovery “continues to require extraordinary monetary policy support.”

At the same time, it significantly increased its growth estimates, forecasting a 6.5 per cent increase this year, up from an earlier prediction of four per cent.

The bank said in a statement that it intends to hold the policy interest rate until the economy is recovered, possibly in the second half of 2022, moved up from an earlier prediction of 2023. 

“in Canada, growth in the first quarter appears considerably stronger than the Bank’s January forecast, as households and companies adapted to the second wave and associated restrictions,” the bank said.

The central bank meets every six weeks to set its interest rate based on whether or not the economy needs a helping hand or to be slowed down in the face of too-high inflation. The bank’s rate filters into the real economy by impacting the rates that consumers get on things like variable rate mortgages and savings accounts.

The bank cuts its rate when it wants to encourage borrowing and investing to stimulate the economy, and it raises its rate to cool things down.

The bank slashed its rate shortly after the pandemic started in March 2020, cutting it by 1.5 percentage points over a few weeks to give the economy stimulus to weather COVID-19.

The bank said it is looking for inflation to hit two per cent on a sustained basis before it makes changes to the interest rate.

Canada’s inflation rate was at 2.2 per cent in March, according to Statistics Canada results released Wednesday, but the bank said such numbers are expected over the next few months due to price of some goods and services falling sharply at the beginning of the pandemic.

The bank said it “looks through” such temporary movements in inflation. 

Bank governor Tiff Macklem will speak on its quarterly monetary policy report at 11 a.m. ET:

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