At 23:00 GMT on Wednesday evening, the Bank of Canada announced its first interest rate resolution of the New Year. The Bank of Canada announced that it left its benchmark interest rate unchanged at 0.25%, in line with market expectations.
After the resolution came out, the Canadian dollar surged, and the dollar plunged 50 points against the Canadian dollar in the short term, and then the decline expanded to 0.9%.
Regarding economic expectations, the Bank of Canada said it is more pessimistic, expecting Canada’s GDP to decline by 5.5% in 2020, 4.0% GDP growth in 2021, 4.8% GDP growth in 2022 and 2.5% GDP growth in 2023.
The Bank of Canada said the economy remains quite weak with Canada and other countries suffering from setbacks in the recovery, with the output gap narrowing to -3.75% to -2.75% in the fourth quarter of 2020.
As for the recovery, the economic outlook remains highly dependent on the timeline for vaccine rollout, the outbreak and the path of new variants.
The earlier than expected launch of the vaccine means a safer recovery and stronger growth in the medium term for the Canadian economy. Economic activity in Canada is expected to return to pre-Epidemic levels by the end of 2021; housing demand in Canada shows resilience and should remain high through early 2021.
However, the Bank of Canada is committed to continuing its monetary stimulus until the economic recovery is well underway.
In terms of policy path, the Bank of Canada remains committed to providing the appropriate level of monetary policy stimulus to support the recovery and achieve its Inflation target.
This includes quantitative easing, with the central bank maintaining its asset purchase program at C$4 billion per week, but also mentioning that the balance sheet may decline over the next three months as more than C$140 billion of short-term Treasury bills and enhanced repos mature.
The central bank noted that it will keep the policy rate at the lower limit of the effective interest rate (ELB) until economic weakness is absorbed so that the 2% inflation target can be achieved sustainably in 2023; and will continue to maintain its extraordinary forward guidance.
Fiscal and monetary stimulus will help offset the impact of the epidemic in Canada, and fiscal policy is expected to support growth through 2023.
Finally the central bank touched on the exchange rate. The Bank of Canada noted that a hypothetical rise in the level of the Canadian dollar would be a deterrent to foreign demand.
However, low inflation may ease downward pressure on the exchange rate, and the central bank predicts that Canadian inflation may not reach 2% consistently until 2023.
It is worth noting that just today’s Canadian inflation data released at 21:30 performed poorly, with the monthly CPI rate recording -0.2% in December, a new low since April of last year. Canada’s annual CPI growth rate for 2020 is the slowest since 2009.
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