The Bank of Canada kept its key interest rate on hold Wednesday even as it said it now expects the economy will grow over the first three months of this year, an about-face from its previous forecast just weeks ago that 2021 would begin with an economic slump.
In January, the central bank warned that lockdowns and tightened health restrictions across much of the country would force real gross domestic product to contract in the first quarter of 2021.
But then Statistics Canada reported the economy was stronger than expected to end last year and gave a preliminary estimate that January eked out a small gain despite strict public health restrictions.
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The central bank’s senior decision-makers said in a statement Wednesday that the resilience in the economy has to do with consumers and businesses adapting to new rounds of lockdowns and restrictions.
The statement also pointed to a stronger-than-expected housing market as a driver of a now-expected rise in GDP for the first three months of the year.
Still, the Bank of Canada warned of considerable uncertainty about the path of the pandemic that muddies longer-term economic outlooks, including how long it will take for the labour market to recover from historic losses last year.
The statement from the bank also pointed to new, more transmissible variants of COVID-19 as the biggest risk to an economic recovery, warning localized outbreaks could “restrain growth and add choppiness to the recovery.”
The result was the Bank of Canada kept its key interest rate target on hold at 0.25 per cent, which is as low as it can go and where the bank says it will stay until the economy recovers and inflation is back at its two per cent comfort zone, which it doesn’t see happening until 2023.
Experts believe conditions will see the first rise in rates late next year.
RBC senior economist Josh Nye said the bank’s focus on the disproportionate impact of job losses on low-wage workers, young people and women could also mean rates stay low for longer.
“They want to ensure that the unequal impacts of the pandemic are reversed and these people who have been most impacted are ultimately able to share in the economic growth and the job gains that we’re expecting as the economy reopens,” he said in an interview.
“The labour market discussion is a dovish element that they’re using here to offset some of the optimism about how strong the GDP numbers have been recently.”
The statement from the central bank also said it will continue its quantitative easing program, which is a way for central banks to pump money into the economy.
The key policy rate has been at 0.25 per cent for almost one year after the central bank cut rates three times last March at the onset of the COVID-19 pandemic as the economy went into a historic downturn.
The move was part of the bank’s efforts to keep credit flowing and ease costs for households by driving down the rates charged on mortgages and personal loans.
Even though government aid has, overall, more than offset wage losses, there are still some households, particularly out West, who are feeling a financial squeeze, according to FP Canada, an association of financial planners.
Shannon Lee Simmons, founder of financial planning firm The New School of Finance, said ongoing financial concerns could be because the pandemic further stretched households that weren’t ready for a rainy day.
“That’s where we’re really seeing that dichotomy between the people who are recovering now, even if they took a hit, and the people who are having that kind of financial hangover,” she said.
She added the ongoing uncertainty makes it difficult for some households to plan beyond the next few weeks, and may extend their financial recovery.
A report Wednesday by the Conference Board of Canada predicted a sharp rebound in provincial economies this year as vaccination efforts eventually help to lift restrictions on economic activity and travel. Aiding recovery, the report said, will be pent-up demand and sizable savings from millions of Canadians who managed to keep their jobs.
“Our view is that consumers will lead the recovery over the second half of 2021 as COVID-19 cases dissipate and economic prospects and consumer confidence improves,” Pedro Antunes, the organization’s chief economist, said in a release.
The Bank of Canada is scheduled to update its economic outlook late next month as part of its quarterly monetary policy report.