Canadian Manufacturing

Bank of Canada cuts growth forecast for 2021, holds rate

The bank said it will keep the rate at near-zero until the economy is ready to handle an increase in rates, which it doesn't expect to happen until the second half of 2022.

July 14, 2021  The Canadian Press

The Bank of Canada says the domestic economy will grow at a slightly slower pace this year than it previously thought and sees the risks from COVID-19 waning, but not enough to change its trendsetting policy rate.

The central bank said it expects the economy to grow 6.0 per cent in 2021, down from its previous forecast of 6.5 per cent. However, the bank now expects growth of 4.6 per cent in 2022, up from its earlier forecast of 3.7 per cent.

The reason for the shift has to do with a weaker first half of the year than the bank previously expected as the economy was hampered by lockdowns and restrictions.

With public health restrictions partially or entirely lifted across the country, the central bank now expects consumers to start spending more, including the $200 billion in savings Canadians accumulated during the pandemic.

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The bank’s updated economic outlook also says spending shouldn’t be affected by a decline in federal aid as it expects more people to get back to work, meaning they earn more and offset declines in government assistance.

“The reopening of the economy and the strong progress on vaccinations have given us reason to be more optimistic about the direction of the economy,” governor Tiff Macklem said in his opening statement at a late-morning press conference. “But we are not there yet, and we are mindful that the process is likely to be bumpy, and some scars will remain.”

As a result, the bank kept its key policy rate on hold at 0.25 per cent on Jul. 14, where it has been since the onset of the pandemic.

The bank said it will keep the rate at near-zero until the economy is ready to handle an increase in rates, which it doesn’t expect to happen until the second half of 2022.

One reason the bank plans to let inflation run hot is because the country’s labour market needs to hire roughly 550,000 people just to reach pre-pandemic employment levels.

“Employment has once again begun to rebound, and we expect the hardest-hit segments of the labour market to post strong gains as the economy reopens.” the bank said in a statement.

“However, the pace of the recovery will vary among industries and workers, and it could take some time to hire workers with the right skills to fill jobs.”