Bank of Canada Holds Rates Steady at 0.25% Even As It Expects Economy to Shrink Until March

The Bank of Canada has kept the benchmark rate steady at 0.25%, reiterating its pledge to keep the number there "until the recovery goes well"

Eight times a year, Canada’s central bank meets to set its benchmark interest rate, known as the target for the overnight rate, which impacts the rates that Canadians get on things like mortgages and savings accounts at banks.

All things being equal, the bank slashes its rate when it wants to stimulate borrowing and investing and raises it when it wants to cool things down. The bank slashed its rate a number of times starting in March of last year, as the COVID-19 pandemic was just starting.

In a statement, the bank has announced it will be staying the course for now.

“Canada’s economy had strong momentum through to late 2020, but the resurgence of cases and the reintroduction of lockdown measures are a serious setback,” the bank said.

“Growth in the first quarter of 2021 is now expected to be negative,” the bank said, forecasting that GDP will shrink by another 2.5 per cent in the first quarter of 2021, compared to where it was at the end of December. This comes after the economy already shrank by 5.5 per cent last year.

The short term looks gloomier than it did a few months ago, but the bank said it still thinks the deployment of vaccines this year will help power a strong bounce back for the economy. The bank thinks the economy will grow by four per cent for 2021 as a whole, and by another 4.8 next year.

The bank decided not to cut its rate, and it also elected to keep its bond-buying program unchanged at $4 billion a week.

The bond-buying program, known as quantitative easing, or QE, is another tool at the bank’s disposal that allows it to stimulate the economy because by buying up government bonds, the bank is lowering interest rates even more — putting more cash into the system that’s available to be spent.

While it says it won’t be scaling back those bond buys for now, slowing that pace of buying is clearly on the table.

One reason for optimism is the record amount of cash that Canadians have saved during the pandemic will soon be put to use and spent on goods and services this year.

“A lot of the things that middle- and higher-income household buy, they can’t do, they can’t go to restaurants, they can’t go to movies. They can’t travel. So, as a result, they’re not spending that money now,” Macklem said.

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