Connect with us

News Report

Bank of Canada holds interest rate at 0.25%

WebSite Design  404-590-1763


Bank of Canada holds interest rate at 0.25%

Pace to decline after economy bounced back faster than expected in third quarterAuthor of the article:Kevin CarmichaelPublishing date:Sep 09, 2020  •   •  3 minute readTiff Macklem, governor of the Bank of Canada. Photo by BloombergArticle contentCentral banks pride themselves on their ability to keep their eyes on the horizon, no matter the distraction.The Bank of…

Bank of Canada holds interest rate at 0.25%

Pace to decline after economy bounced back faster than expected in third quarter

Author of the article:

Kevin Carmichael

Publishing date:

Sep 09, 2020  •   •  3 minute read

Tiff Macklem, governor of the Bank of Canada. Photo by Bloomberg

Article content

Central banks pride themselves on their ability to keep their eyes on the horizon, no matter the distraction.

The Bank of Canada stayed true to form on Sept. 9, acknowledging a faster-than-expected rebound from the economic collapse that followed the COVID-19 lockdowns, while sticking to its story that the recovery, ultimately, will still be bumpy and drawn out.

“The bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support,” the central bank said in a revised policy statement. “The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.”

More On This Topic

Governor Tiff Macklem and his deputies on the Governing Council left the benchmark lending rate at 0.25 per cent, the lowest setting ever, and restated their commitment to purchase at least $5-billion worth of government bonds per week with newly created money. Those two policies form the core of the central bank’s efforts to keep borrowing costs uncommonly low until the recovery is “well underway.”

Policy-makers reiterated that the benchmark lending rate will remain pinned near zero until the central bank’s two-per-cent inflation target is “sustainably achieved,” an unusually explicit promise meant to give businesses and households confidence that they needn’t worry about a surprise jump in borrowing costs. They added that asset purchases will be “calibrated” to keep market interest rates at levels that “support the recovery and achieve the (Bank of Canada’s) inflation objective.”

The Consumer Price Index (CPI) increased only 0.1 per cent in July from a year earlier, and the Bank of Canada’s latest projections imply it will be at least a couple of years before the economy gains enough strength to put sustained upward pressure on prices.

Real Life. Real News. Real Voices

Help us tell more of the stories that matter

Become a founding member

“CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term,” the statement said.

To be sure, the Bank of Canada’s forecast specialists were conservative in July when they helped their bosses construct a “central scenario” of how Canada’s economy might recover from an epic collapse. The summer Monetary Policy Report assumed that gross domestic product free-fell at an annual rate of 43 per cent in the second quarter, and would rebound at a rate of about 31 per cent in the third quarter.

Article content continued

GDP dropped at an annual rate of about 39 per cent between April and June, Statistics Canada reported on Aug. 28. The extraordinary level of government support for households appears to have offset a significant amount of the immediate damage from effectively closing the economy for most of the spring. That should mean a stronger “reopening” phase as lockdown measures were eased heading into the summer.

The Bank of Nova Scotia’s “nowcast,” which estimates the current quarter’s growth rate by assembling key indicators in real time, suggests the economy is growing at an annual rate of about 49 per cent, significantly better than the central bank’s July estimate.

“As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July,” the central bank said. “While recent data during the reopening phase is encouraging, the bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”

Few, if any, economists expect the current pace will be sustained. Aid programs are scheduled to be tapered off or ended during the autumn and elevated levels of joblessness and bankruptcies will dent the economy’s ability to generate wealth. The virus will continue to weigh on confidence until a vaccine is discovered and produced at scale.

Jean-François Perrault, Bank of Nova Scotia’s chief economist, still estimates that Canada’s GDP will decline 5.7 per cent in 2020, and grow only 4.8 per cent in 2021, an outlook that aligns with those of most of his peers.

“The economy has much work to do to absorb all of its excess capacity,” Arlene Kish, director of Canadian economics at IHS Markit, advised clients in a note last week.

•Email: | CarmichaelKevin

Subscribe to the newsletter news

We hate SPAM and promise to keep your email address safe


Popular Articles

Latest News

To Top