The central bank reiterated its guidance that rates would remain unchanged until at least the second half of 2022.
Weaker-than-expected economic growth and higher-than-normal inflation don’t seem to bother Bank of Canada Governor Tiff Macklem and his deputies too much, who said today that the latest economic data is in line with their outlook. Importantly, they stood firm in their view that the economy could explode this summer as the third wave of COVID-19 infections fades away as a serious health threat.
“Economic developments have been in line with prospects,” the central bank said. saying in your new policy statement. “With vaccines advancing at a faster pace and provincial containment restrictions on a loosening path during the summer, the Canadian economy is expected to recover strongly, led by consumer spending.”
As expected, Macklem and his advisers on the Governing Council chose to leave the benchmark interest rate unchanged at 0.25 percent, the lowest in history. They reiterated their intention to leave the policy rate unchanged until at least the second half of 2022, an extraordinary promise aimed at strengthening business and consumer confidence by assuring the public that they can count on exceptionally low interest rates for a period of time. set time.
“The Governing Council judges that considerable overcapacity continues to exist in the Canadian economy and that the recovery continues to require extraordinary support from monetary policy,” the statement said.
A small number of observers wondered if the prospect of a strong recovery this summer could cause the Bank of Canada to relax a bit, as it did in April, when it cut its weekly purchases of Canadian government bonds. That did not happen.
Instead, lawmakers reaffirmed their commitment to buy $ 3 billion worth of federal debt each week, a strategy that puts additional downward pressure on borrowing costs by creating greater demand for the securities they are on. the prices of most other financial assets based. Bond yields fall when prices rise, so the Bank of Canada, using its unique power to create money, can generate stimulus by joining the bid for financial assets.
Bay Street economists who are keeping a closer eye on the central bank assumed that the Bank of Canada would remain in a holding pattern after its latest round of deliberations on interest rates. Macklem has said he is prepared to boost the economy until hiring returns to pre-pandemic levels, and that he assumes that the burst of inflation this spring will be a temporary phenomenon. You could adjust your thinking if the facts turn, but nothing has happened since the Bank of Canada updated its outlook in April that required a course correction.
Gross domestic product (GDP) grew at an annual rate of 5.6 percent in the first quarter, a decent pace given everything that happened in the last year, but it is slower than the seven percent recovery rate that the Bank from Canada forecast in April. Meanwhile, the Consumer Price Index (CPI), which is the indicator used by the central bank to calibrate interest rates, arose to 3.4 percent in April, breaking the upper end of the comfort zone for policymakers.
The Bank of Canada acknowledged that the latest GDP reading was weaker than expected, but still described the growth rate as “robust.” Policymakers attributed the lack to a large decline in inventories and a larger-than-expected increase in imports, two things commonly associated with strong demand. “The underlying details indicate increased sentiment and resilient demand,” the statement said.
Policymakers have remained firm in their view that hotter inflation will pass, arguing that current annual readings are being overstated by the economy’s brush with deflation in 2020. Still, they indicated that they are sensitive. to the possibility that they could be wrong, doing their best to assert that the factors they had previously identified as risks to their inflation outlook “remain relevant.”