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The Bank of Canada Holds the Interest Rate at 0.25% to Boost Economic Activity

January 21, 2021 • Bank of Canada Announcement, Bank of Canada Interest Rate, Interest Rate Announcement

Economic recovery has slowed down due to new waves of COVID-19 infections and the consequent restrictive measures.

Though, the arrival of vaccines in Canada is definitely a positive development.

In this uncertain economic situation, the Bank of Canada continues to provide fiscal and monetary policy support to boost economic activity and improve the medium-term growth outlook.

The Bank confirmed today that it will continue to hold its target for the overnight rate at the effective lower bound of 0.25%. It is also continuing its quantitative easing (QE) program at its current pace of at least $4 billion per week.

While the Canadian economy showed a strong momentum until late 2020, the resurgence of cases and the reintroduction of lockdown measures, across multiple regions, has impacted economic performance. The Bank shared that the growth in the first quarter of 2021 is now expected to be negative.

In terms of yearly projections, the Bank projects that the economy will grow by 4% in 2021, almost 5% in 2022, and about 2.5% in 2023.

When it comes to inflation, the CPI inflation has risen to the low end of the Bank’s 1-3% target range in recent months. However, the measures of core inflation are still below 2% and are expected to return sustainably to the 2% target by 2023.

While the outlook may look uncertain, there is a consensus on one thing – Canada’s economy is relying heavily on real estate.

Statistics Canada data shows that residential investment rose to a record high in Q3 2020.

Better Dwelling shares that the amount dedicated to residential investment has increased significantly and is in fact, the biggest number ever.

The total amount of $54.89 billion, recorded in Q3 2020, was 39.34% higher than that recorded in the previous quarter. It is also 18.03% higher when compared to the same quarter in 2019.

While real estate remains a strong contributor to the economy, experts have observed that the rate of growth, in the industry, is beginning to slow down.

The Teranet–National Bank National Composite House Price Index, for instance, was up 0.6% from the previous month. While this is the strongest gain for December, since 2009, December 2020 was the second consecutive month in which the index rose less than the month before.

A more in-depth look shows that the unsmoothed composite index, seasonally adjusted, was up 0.2% in December. This suggests that the upwards trajectory of the smoothed index could slow down further in the coming months.

While uncertainty dominates the short-term outlook, vaccine roll-out has increased optimism.

With the provinces continuing to take steps to reduce COVID-19 cases and Canadians continuing to play their part in curbing the transmission of the virus, the Canadian economy can rebound as soon as Q2 2021.

Read the full Bank of Canada rate announcement here:  https://www.bankofcanada.ca/2021/01/fad-press-release-2021-01-20/

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