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Canada Monetary Policy April 2021

Canada: Bank of Canada keeps rates unchanged in April, but eases its asset purchasing program

At its meeting on 21 April, the Bank of Canada (BoC) kept its target for the overnight rate at 0.25%, its effective lower bound, in line with market analysts’ expectations. However, the Bank decided to reduce its quantitative easing program from its previous pace of at least CAD 4.0 billion per week to CAD 3.0 billion per week.

The Bank’s decision to hold the rate was mainly aimed at supporting the ongoing economic recovery. The BoC noted that the economy has continued to show some resilience in the face of renewed lockdown measures over the past several months. Strong government stimulus measures, pent-up household demand, spillover effects from a recovering U.S. economy and solid progress on the vaccine front should support activity over the medium term, but in the short term the recovery remains uneven across sectors and employment groups. The Bank upgraded its forecast for GDP growth in 2021 to 6.5% from January’s 4.0%. On the price front, higher oil prices and a low base effect will keep inflationary pressures closer to the upper bound of the Bank’s 1.0%–3.0% target range in the coming months—inflation reached 2.2% in March—but ongoing economic slack should bring price pressures closer to the 2.0% midpoint in the second half of the year.

Looking ahead, the BoC is committed to keeping its target for the overnight rate at its effective lower bound until “economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”. That said, the Bank noted that based on its current projections, this could be achieved sometime in the second half of 2022, which was slightly more hawkish than its previous estimate of sometime in 2023. In terms of its quantitative easing program, the BoC will continue to adjust its purchases accordingly in line with the pace of the economic recovery.

Commenting on the outlook for monetary policy, Sri Thanabalasingam, a senior economist at TD Economics, noted:

“The Bank of Canada will be watching vaccine and virus developments closely. The speed of the economic recovery is dependent on vaccines winning the race against Covid-19 and its variants. This is the key downside risk in the Bank’s projection and bad news on this front could see the Bank delay its plans for when monetary policy will normalize.”

The next meeting is scheduled for 9 June.

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