Possible Interest Rate Hike Could be Coming Sooner than Expected

The Bank of Canada held its benchmark overnight lending rate steady at a record low 0.25% on Wednesday, even as it is expecting better times ahead sooner than expected.

In its accompanying statement, the Bank suggested a recovery in the economy and the potential for an increase in interest rates could now come in the second half of 2022, compared to its earlier forecast of 2023. Similarly, the Bank is estimating a 6.5% increase in economic growth this year, up from its previous prediction of 4%. Also, the Bank said it would begin slowing its quantitative easing program as soon as next week, reflecting the ‘progress made in the economic recovery.’

“The outlook has improved for both the global and Canadian economies,” the Bank said. “Activity has proven more resilient than expected in the face of the COVID-19 pandemic, and the rollout of vaccines is progressing.”

However, the Bank warned the third wave of the pandemic – which is straining healthcare systems and affecting hard-to-distance activities - has introduced a new dimension of uncertainty. As such, the recovery remains highly dependent on the evolution of the pandemic and the pace of vaccinations, it added. But as vaccines roll out and the economy reopens, the economy is expected to rebound strongly in the second half of this year, the Bank said.

Inflation is expected to rise temporarily to around the top of the Bank’s 1-3% inflation-control range over the next few months, but then retreat back toward 2% over the second half of 2021. Statistics Canada today reported that Canada's inflation rate was 2.2% in March.

The Bank will make its next rate announcement on June 9.

Source: DePutter Publishing Ltd.

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