The Bank of Canada kept its trend-setting interest rate at the record low of 0.25 per cent on Wednesday, and signalled it plans to continue to do everything it can to stimulate the economy even as there are signs the recovery from COVID-19 is going better than expected.
The bank’s benchmark interest rate, known as the target for the overnight rate, impacts the economy by influencing the rates that people and businesses get at their banks for things like savings accounts and mortgages. Broadly speaking, the central bank cuts its rate to stimulate the economy by making it cheaper to borrow and invest. When it wants to slow down an overheated economy, the central bank raises its rate.
The bank slashed its rate shortly after the pandemic started in March 2020, cutting it by 1.5 percentage points in a few shorts weeks to give the economy stimulus to weather COVID-19.
The bank signaled a few months ago that it has no plans to raise its rate for another two years, and it reiterated that plan on Wednesday.
“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until into 2023,” the bank said.
In addition to cutting its rate, the bank also decided to try to stimulate the economy by buying up bonds, in a process known as quantitative easing. Buying bonds helps the economy by increasing the supply of money, as the bank releases cash into the system in exchange for bonds. And buying bonds also has the effect of making borrowing even cheaper, by pushing down the yield on those bonds.
No economists who follow the bank were expecting it to change its interest rate, but there was some speculation that the bank may slow its pace of bond buying from its current rate of $4 billion a week.
But the bank signalled it will keep buying up bonds for now.
“To reinforce this commitment and keep interest rates low across the yield curve, the Bank will continue its QE program until the recovery is well underway,” the bank said.
Royce Mendes with CIBC said the bank’s statement on bond buying makes it clear it wants to stay the course until it has a better picture of how the recovery from COVID-19 is unfolding.
“The short statement seems to have taken a do no harm approach, kicking the can down the road until April to make any changes to the conditional commitment or pace of bond purchases,” he said.