Bank of Canada Holds Rates Amid Optimism for Vaccine Rebound

(Bloomberg) -- The Bank of Canada held interest rates unchanged and reiterated its commitment to keep them at historical lows to support an economy hit by a second wave of Covid-19 cases and lockdowns.

In a decision Wednesday from Ottawa, policy makers led by Governor Tiff Macklem held the bank’s overnight rate at 0.25% and reiterated a pledge not to raise borrowing costs before damage from the pandemic is fully repaired, something the central bank doesn’t expect will happen until 2023. The bank also recommitted to buying Canadian government bonds worth at least C$4 billion ($3.1 billion) a week as part of those efforts, though it indicated it could pare purchases once the recovery regains its footing.

It was a stand-pat decision, with the central bank holding off from making any policy changes until there’s greater clarity on the evolution of the virus and the effectiveness of the vaccine. Still, officials appear to be optimistic about the economy’s prospects, with no indication they are planning additional measures.

“In view of the weakness of near-term growth and the protracted nature of the recovery, the Canadian economy will continue to require extraordinary monetary policy support,” policy makers said. “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In our projection, this does not happen until into 2023.”

A series of offsetting developments in recent weeks have kept the central bank on the sidelines.

A second wave of Covid-19 cases has forced officials to impose strict measures on businesses and social gatherings that the Bank of Canada is predicting will produce an economic contraction in the first quarter of this year. The nation’s recovery also risks being hampered by a strengthening currency and a pick-up in market interest rates.

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The Canadian dollar extended gains following the decision, up 0.8% to C$1.2627 against the U.S. dollar at 10:18 a.m. in Toronto trading. The yield on government 10-year bonds rose 3 basis points to 0.84%.

The tone in the statement was widely expected, though some analysts had been warning Macklem could be tempted to make a case for additional steps to buffer the economy from the downturn, such as a micro-rate-cut that would bring the policy rate closer to zero.

“I never really bought into the mini-rate-cut idea as it doesn’t provide too much extra stimulus against the near-term headwinds the economy faces,” Simon Harvey, a foreign exchange market analyst at Monex Canada, said by email.

The bank made more substantive changes in October, when it reduced the size of its bond purchases but pledged to buy more long-term securities. The central bank uses its bond purchases to suppress longer-term interest rates.

Policy makers said Wednesday they would continue their quantitative easing program until the recovery “is well underway,” though the pace of purchases will slow as they gain confidence in the recovery.

They also downplayed any worries that all this extraordinary stimulus could drive up inflation. In the statement, officials said economic slack is expected to weigh on price pressures.

At the same time, despite near-term risks, the central bank revised higher its longer-term outlook for the economy amid a faster-than-expected vaccine rollout.

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