Bank of Canada keeps its overnight rate unchanged

Today, the Bank of Canada decided to keep its key lending rate unchanged once again and maintained the pace of bond purchases. Such a decision increases the odds for one more reduction in emergency stimulus in July.

The Governor Tiff Macklem kept the BoC’s overnight rate at 0.25%. He also retained a promise not to raise the rate until damage from the COVID-19 pandemic is fully offset. The central bank will keep purchasing $3 billion (US$2.5 billion) a week of Canadian government bonds, although it says the pace will be reduced as soon as the economic recovery continues.

The Bank’s tone was mostly expected by analysts, who predicted a gradual cutting of bond purchases. In April, the BoC was among the first from advanced economies to switch to a less supportive policy, when it pushed closer the timetable for a possible rate increase and reduced its bond purchases. Another reduction is expected at the Bank’s next rate meeting on July 14.

The Bank’s statement didn’t include any hints at reaction to the on-going growth of the Canadian dollar, although it admitted the currency went up along with commodity prices. The loonie has risen by 5.5% against the U.S. dollar in 2021.

“In case the incoming data is consistent with the central bank’s forecasts, it may reduce weekly bond buying again next month,” – Josh Nye, an economist at RBC, says.

This time, the Bank didn’t provide any new forecasts, that’s why economists didn’t expect a policy change until the next meeting, when new projections will be released. It’ also a possibility for the BoC to assess incoming economic data, as the country recovers from a recent wave of lockdowns.

Deputy Governor Tim Lane will give a speech on Thursday, which may give us more details concerning the Bank’s policy.

Meanwhile, investors in the U.S. don’t expect any rate increase by the Federal Reserve over the next year, predicting only one hike over the next two years.

There are still certain risks. Since the last policy decision, Canada has faced a much harder hit from the COVID-19 restrictions than the BoC had predicted. The economy changed its direction in April and May, losing 275,000 jobs. As a result, the country went further away from employment levels that Macklem considers a full economic recovery.

Next Bank of Canada’s scheduled decision meeting is on July 14.