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Summary
- Bank of Canada maintains benchmark interest rate at 0.25 per cent.
- Bank says Canadian and global economy will rebound quickly, with Canada GDP growth at 6.5 per cent in 2021.
- Inflation is high as prices in same month last year plunged due to COVID-19 impact.
After the Budget 2021 announcement of record spending to lift the economy out of slump, another shot in the arm comes from Bank of Canada’s latest announcement to maintain benchmark interest rate at 0.25 per cent. The rates were slashed in March 2020 after COVID-19 hit the economy hard.
Policy rate at such low level will embolden the industry to borrow. Private investment will complement public investment (stimulus announced on Monday) in boosting new economic activity. In its press release, the Bank also mentions improved outlook for Canadian and global economy. It also cites the ‘third wave’ of the pandemic, with the Bank cautioning that recovery will be ‘dependent’ on how COVID-19 and vaccination program play out in the near future.
Positive indicators
An economic rebound in the US, stronger commodity prices (particularly crude), and accelerated vaccine roll out and adoption are some optimistic elements cited by Bank of Canada. The policy document covers lowering unemployment rates in February and March, and stronger GDP growth in the first quarter than what was forecasted earlier.
Job growth in past months will add to consumption in the second half of 2021, and the Bank projects a strong demand in 2021. Real GDP growth rate of 6.5 per cent is forecasted for the current year.
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Reading CPI inflation right
CPI inflation at 2.2 per cent in March 2021 is to be seen with record plunge in prices in March 2020 due to the onset of pandemic and eventual lockdowns. Notably, gas prices have seen a whopping 35 per cent surge in March this year compared with prices in same month last year. Without factoring in energy prices, year over year inflation is nearly 1.1 per cent.
Adjustments to QE
In its policy document, Bank of Canada commits to holding benchmark rate at effective lower bound until the second half of next year. The quantitative easing (QE) program of the Bank will be adjusted to C$3 billion target for net purchases of government bonds to ensure liquidity in the system.
The Bank has mentioned the risks associated with rise in housing construction and resales prices. Supply bottlenecks, and low bank rates are two reasons for record upsurge in housing prices.
Lower policy rates not only lead to businesses borrowing more, it also affects lending and borrowing rates for retail bank customers. Record low rates in Canada indicate that the Bank wants a prolonged stimulus by injecting more money into the economy. This money, coupled with QE measures and government’s stimulus, will play the key role in economic rebound in Canada.
