Bank of Canada Rate Announcement Yesterday – A Tightrope Ahead

The Bank of Canada (BoC) is keeping its key interest rate target the same and holding it at 0.25%.  They believe that the Canadian economy still requires this low rate even though the economy is doing better than anticipated.

The BoC expects economic growth in the first quarter of 2021 to be positive, versus its previous forecast in January that predicted an economic contraction to start 2021.  They believe that the unpredicted strength in the economy has to do with consumers and businesses adapting well to the latest rounds of lockdowns.

The tight rope ahead – Predictions for the US economy are very positive, especially now that their latest covid bill has passed.  This will directly and positively affect Canada.  That is good news.  The difficulty that will bring to both countries is whether and how much to raise central bank rate(s) if inflation rears its ugly head.  On one side; inflation must be controlled to avert economic damage, but on the other side if rates go up – it will decimate national treasuries and potentially create a need for increased taxes to pay for all of the outstanding debt that they now hold from covid bailouts. 

The BoC did say that they will continue their quantitative easing program which is another way that they can exert influence on economic growth and interest rates.  We believe that they should start curtailing this program in order to make sure that inflation is in check, i.e.: to ensure there isn’t too much money chasing too few goods and services as the economic outlook looks brighter.

Interest rates are still low and stable for the time being.  How the economy performs coming out of pandemic times will be the largest factor in determining what central banks will do with their key rates.  There may possibly be a diversion in what happens to central bank rates and other market interest rates in time.