Bank of Canada Leaves Lending Rate Unchanged

The Bank of Canada left its overnight lending rate unchanged at 0.25% as expected on Wednesday, further reiterating that interest rates are not likely to rise until later next year.

In its accompanying statement, the Bank said the economic recovery from the pandemic continues to require extraordinary monetary policy support, adding it remains committed to holding fast on rates until the 2% inflation target is ‘sustainably achieved,’ – likely sometime in the second half of 2022. Inflation has risen to around the top of the Bank’s 1-3% inflation-control range, with much stronger gasoline prices contributing to the uptick. And while inflation will likely remain near 3% through the summer, it is expected to ease later in the year, the Bank said.

As part of today’s rate announcement, the Bank said it would also continue its current quantitative easing program, under which is it buying $3 billion of Canadian government debt per week. That is unchanged from May but analysts expect the amount to gradually decline in the months ahead as the recovery picks up steam.

The Bank noted renewed lockdowns associated with the third wave of the COVID-19 pandemic are dampening economic activity in the second quarter, adding the employment rate remains well below its pre-pandemic level, with low wage workers, youth and women continuing to bear the brunt of job losses. On the other hand, first quarter GDP growth came in at a robust 5.6 %. While this was lower than the Bank had projected, the underlying details indicate ‘rising confidence and resilient demand,’ it said.

The growth in Canadian farm debt slowed in 2020 – rising 5.9% versus the 10-year average of 6.5% - but Farm Credit Canada senior economist Leigh Anderson warned earlier this week that even a small increase in interest rates will still have a substantial impact on farm interest payments. Canadian farmers collectively owed nearly $122 billion at the end of 2020.

The Bank of Canada will make its next interest rate announcement July 14.

Source: DePutter Publishing Ltd.

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