Canada’s central bank opted to keep its benchmark interest rate steady at a record-low 0.25 per cent Wednesday but hinted that it could start hiking interest rates in late 2022, saying “the outlook has improved for both the global and Canadian economies.”
The Bank of Canada revised its growth estimates, forecasting a 6.5 per cent increase this year, up from an earlier prediction of four per cent.
“In Canada, growth in the first quarter appears considerably stronger than the Bank’s January forecast, as households and companies adapted to the second wave and associated restrictions,” the bank said in a statement.
However, new lockdowns will pose another setback and the labour market remains difficult for many Canadians, especially low-wage workers, young people and women, the central bank warned.
Governor Tiff Macklem, speaking to reporters after the decision, made clear that while the bank is committed to refrain from raising rates until the economy is running at full capacity. There is no guarantee borrowing costs will rise when those conditions are met, he cautioned.
“What we do when those conditions are met, we’ll have to assess that at the time. There’s nothing mechanical,” Macklem said. “We’re looking for a full recovery, we’re not going to count our chickens before they’re hatched.”
Macklem said the second wave of the pandemic had much less economic impact than the first wave, with a quick bounceback and substantial job gains in February and March.
While the third wave has been another setback for the economy, Macklem said Canada’s economic performance in recent months has increased the bank’s confidence in the underlying strength of the recovery.
“The Bank of Canada has made a drastic U-turn in the space of three months from being extremely cautious to being extremely upbeat,” BMO Capital Markets economist Benjamin Reitzes said in a note to clients.
“While there’s still some ways to go until we get a move on rates, the Bank has taken the first step toward exiting [quantitative easing], in what is clearly a more hawkish statement than markets anticipated.”
With files from CBC News, Reuters and The Canadian Press