On January 20, the Bank of Canada published its Monetary Policy Report and announced that it will leave its target overnight benchmark rate unchanged at 0.25% and the Bank Rate will stay at 0.5%. This is good news for Ontarians planning to buy property or refinance as borrowing costs will continue to stay low. It is likely that in the next policy announcement, on March 10, 2021, the Bank will keep the rate the same.
These are the main points about the Canadian economy from the Bank’s Q1 announcement:
- The the economy was recovering through late 2020. However, the resurgence of COVID-19 cases and the provincewide shutdowns to slow the spread has slowed down the economy again. Considerable economic slack remains in the economy, and a complete recovery will take some time
- GDP declined 5.5% in 2020 and the Bank forecasts that it will decline by 2.5% in Q1. A rebound is expected in Q2 as the Bank assumes that pandemic related restrictions will be lifted later in Q1
- As vaccines are being rolled out earlier than anticipated, the recuperation in the Canadian economy is now more secure. The economy is projected to grow by 4% in 2021 and almost 5% in 2022
- Inflation is not anticipated to return sustainably to its 2 percent target until 2023. Economic slack is forecast to put downward pressure on inflation throughout 2021 and 2022.
- Consumer price index (CPI) inflation has risen from its 2020 lows. The Bank anticipates that CPI inflation will continue to increase in the near term mainly due to gasoline price dynamics. CPI is 0.4% higher than CPI inflation in recent months but remains well below the Bank’s target
- Consumption is forecast to underpin economic recovery. Medium-term growth is forecast to be stronger as consumption is expected to gain momentum as more Canadians are vaccinated and employment rises. Consumption will be influenced by consumer confidence, elevated levels of disposable income, recovery of the labour market and elevated levels of disposable income. Foreign demand should drive export recovery, though the assumes higher level of the Canadian dollar with act as a headwind
- Business investment strengthens as uncertainty recedes, though recovery in business investment is likely to be uneven
What the future holds
Much of the economic projections in the Bank’s Monetary Policy Report depend on certain assumptions. These are based on the expectation that the vaccination rollout progresses as planned and how this will reduce the spread of the virus and allow the easing of restrictions.
The Canadian economy will continue to need “extraordinary monetary policy support.” Therefore, the Bank will continue to hold the policy interest rate until economic slack is absorbed and the 2% inflation target is achieved. This is likely to be achieved in 2023. The quantitative easing program will continue until the economic recovery is well underway. It is therefore expected that interest rates will continue to remain low for some time.
If you wish to take advantage of these low interest rates for mortgage refinancing, debt consolidation or investment properties, contact us.