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The Bank of Canada to Keep its Key Interest Rate at 0.25% Until the National Economic Picture Improves

Until the national economic picture improves, the Bank of Canada will keep its key interest rate at 0.25 percent. On Wednesday, the governor Tiff Macklem said that this would take “a long time.” The borrowing will relatively be inexpensive to low-interest rates to help households and businesses recover from the COVID-19 pandemic. Because of the uncommon level of uncertainty facing Canadians, people are worried about their health and jobs. What the bank expects is lifting of lockdowns, giving way to a slower, bumpier recuperation phase for a quick but partial economic bounceback.

The bank is also expecting the economy to reduce by 7.8 percent this year, driven downward by a year-over-year contraction of 14.6 percent in the second quarter. This is according to its updated economic outlook released Wednesday. However, it expects a growth of 5.1 percent in 2021. Both figures are less rosy than those of the Trudeau Liberals. The Bank of Canada report pegged the annual inflation rate at 0.6 percent this year, rising to 1.2 percent in 2021 and 1.7 percent in 2022.

Macklem said that they have been unusually clear about the future path for interest rates since Canadians are facing an unusual amount of uncertainty. He added that people could be confident that interest rates will be low for a long time. He cautioned that a severe second wave of the pandemic or a delay in the development of a COVID-19 vaccine could easily be thrown off the forecasts. He also confirmed that the bank’s “central planning scenario” could be hampered if schools and daycares only partially reopen, which could leave parents to choose between work and child care.

Macklem said during a late-morning press conference that families are facing real challenges and is hoping we can find a way to reopen schools and get daycares back to work. Since taking over as a governor last month, the rate announcement and outlook are the first Macklem has been directly involved in. Macklem endorsed last month’s rate hold though he was only an observer during the June round of deliberations by the bank’s governing council. Since March, when the central bank cut the interest sharply in response to the economic harm from COVID-19, 0.25 percent has been the key interest rate.

The $5 billion of federal bonds weekly is among the unprecedented purchasing program started by the bank and would continue until the economy recovers. Through to next year’s May, Scotiabank’s Derek Holt indicated that could mean $215 billion more bond purchases. Holt wrote in a research note that he was not sure that the markets could handle that over time without courting the risk of market dysfunction. The outlook suggests output will be four percent lower in 2022 than envisioned pre-pandemic. However, the bank believes the country has been spared from a worst-case scenario envisioned by the bank in April.

RBC senior economist Josh Nye wrote in a note that even when the economy has recovered to ‘full capacity,’ GDP will be notably smaller than the previous trajectory the country was in. The central bank’s economic outlook warned some lower-income workers that they “will face prolonged income losses” and push more households to the financial brink, because of job losses or cuts in earnings. The report also noted that some households would prioritize paying down debts and padding rainy-day funds due to the uncertain economic environment. In the domestic economy, the Bank of Canada will provide a more detailed analysis of its long-run assumptions for when it updates its outlook in late October.

Source: https://www.ctvnews.ca/business/bank-of-canada-holds-key-interest-rate-forecasts-gdp-decline-1.5024802

About the author

Dani Scott

Dani Scott

Dani Scott is a former freelance writer for different editorials and at the present moment he serves as an independent Reporter for Blog.ca.

Dani's hobby is social media tweeting and understanding of the universe.

He can be reached out at: dani.scott@blog.ca

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