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Bank of Canada Maintains Overnight Interest Rate, Eyes Future Economic Recovery

The Bank of Canada announced Wednesday it will maintain its target overnight rate at 0.25%, noting optimism about economic recovery as a result of worldwide vaccination progress.  

The target for the overnight rate has been held steady since March 2020, when COVID-19 was first declared a global pandemic. 

Cautious optimism

The Bank was cautiously optimistic in its release.

“The global economy is recovering strongly from the COVID-19 pandemic, with continued progress on vaccinations, particularly in advanced economies,” the Bank of Canada wrote in a release. “However, the recovery is still highly uneven and remains dependent on the course of the virus. 

“The recent spread of new COVID-19 variants is a growing concern, especially for regions where vaccination rates remain low.”

Quantitative easing 

The Bank also announced Wednesday it’s adjusting its Quantitative Easing (QE) program, lowering it from a target pace of $3 million per week to a target pace of $2 million per week.

QE is an unconventional form of monetary policy where a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.

What it means for mortgage shoppers

For mortgage shoppers, the most significant news out of the announcement is that the Bank remains committed to leaving the key overnight rate unchanged until the second half of 2022, says James Laird, cofounder of Ratehub.ca and president of CanWise Financial. 

“This is good news for anyone who currently has a variable rate and anyone choosing between fixed and variable might lean more towards variable rates in light of this announcement,” Laird says. “However, variable rates are only appropriate for consumers who are comfortable with a little more risk. Anyone who puts a lot of value in rate certainty should still go with a fixed rate. With the variable rate at a record low of 0.98% and the fixed rate near its record low at 1.74%, Canadians have two excellent options to choose from.”

Laird notes the positive tone of the announcement, both in Canada and around the world.

“Globally, the Bank is predicting higher oil prices and 7 per cent year-over-year GDP growth. Within our borders, the Bank is expecting to see an employment rebound in the hardest-hit segments of the labour market, which will help achieve their expectation of 6 per cent GDP growth,” he says. “The Bank notes some areas of concern including more contagious variants and inflation remaining above target, however, the Bank continues to believe this is a temporary bump in inflation and expects it to moderate in early 2022.”

The Bank of Canada hinted that its overnight rate will likely remain unchanged until its inflation target is achieved.

“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,” it wrote. “In the Bank’s July projection, this happens sometime in the second half of 2022.”

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