Bank of Canada keeps its overnight rate unchanged once again

Today, the central bank kept its key lending rate at 0.25% and reiterated its plan to hold it that way in order to support the economy hit by the second wave of COVID-19 and lockdowns.

The Governor Tiff Macklem held the rate at 0.25% and reiterated a commitment not to raise it until the damage from the pandemic is fully offset. The Bank of Canada doesn’t expect it to happen until 2023. The BoC also recommitted to purchasing Canadian government bonds worth at least $4 billion a week, although it noted it could reduce buying when the recovery regains its pace.

The central bank made no changes waiting for more clarity on the development of the virus and the effectiveness of the vaccine. At the same time, officials are quite optimistic concerning the economy’s outlook.

“With a potential weakness of near-term growth and the slower pace of the recovery, the national economy will still need strong monetary policy support,” – policy makers noted. “The Governing Council will keep its key lending rate at the current lower bound until the economic slowdown is absorbed and the 2% inflation target is achieved. In our opinion, this will not happen until 2023.”

Several depressing developments in recent weeks have made the BoC remain on the sidelines.

The second wave of COVID-19 has made officials implement strict measures on businesses and social gatherings, and the BoC expects it to lead to an economic contraction over the first quarter of 2021. Canada’s recovery also risks being affected by a strengthening currency and an increase in market interest rates.

The Canadian dollar continued to grow after the announcement, showing a rise by 0.8% to $1.2627 against the U.S. dollar. Meanwhile, the yield on government 10-year bonds was up by 0.03% to 0.84%.

The tone of the statement was not a surprise, although certain experts believed Macklem could make a micro-rate-cut in order to support the economy.

“I never really expected a mini-rate-cut, as it doesn’t provide too much additional stimulus against the near-term headwinds the economy faces,” – noted Simon Harvey from Monex Canada.

As you know, in October, the BoC made more significant changes, decreasing the size of its bond purchases but promising to purchase more long-term securities. The Bank uses its bond purchases to suppress longer-term interest rates.

Policy makers noted they would keep their quantitative easing program until the recovery gains pace, but will slow it down as they see confidence in the recovery.

Moreover, they played down fears over a possibility of this stimulus to raise the inflation. According to the officials, economic slowdown will weigh on price pressures.

Meanwhile, despite near-term risks, the BoC bank also raised its longer-term outlook for the economy amid a faster vaccine rollout.

The next central bank’s rate meeting is on March 10, 2021.