Bank of Canada holds rate steady at 0.25% even as it expects economy to shrink until March

The Bank of Canada elected to keep its benchmark interest rate steady at 0.25 per cent on Wednesday, reiterating its pledge to keep it there “until the recovery is well underway.”

Eight times a year, Canada’s central bank meets to set its benchmark interest rate, known as the target for the overnight rate, which impacts the rates that Canadians get on things like mortgages and savings accounts at banks.

All things being equal, the bank slashes its rate when it wants to stimulate borrowing and investing and raises it when it wants to cool things down.

The bank slashed its rate a number of times starting in March of last year, as the COVID-19 pandemic was just starting.

There had been some speculation prior to Wednesday that the bank may decide to cut again from its current level of 0.25 per cent, as virus numbers have been moving higher for several weeks now.

But in a statement, the bank said it’s going to stay the course for now.

“Canada’s economy had strong momentum through to late 2020, but the resurgence of cases and the reintroduction of lockdown measures are a serious setback,” the bank said.

“Growth in the first quarter of 2021 is now expected to be negative,” the bank said, forecasting that GDP will shrink by another 2.9 per cent between January and March of this year. This comes after the economy already shrank by almost six per cent last year.

The short term looks gloomier than it did a few months ago, but the bank said it still thinks the deployment of vaccines this year will help power a strong bounceback for the economy. The bank thinks the economy will grow by four per cent for 2021 as a whole, and by another five per cent next year.

“The outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus,” the bank said.

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