Bank of Canada keeps interest rate on hold, sees economy improvement ahead

The Bank of Canada is keeping its key interest rate target on hold as it raises its outlook for economic growth this year.

The key rate remains at 0.25 per cent where it has held steady for more than a year.

The decision came as the Bank of Canada raised its prediction for economic growth this year to 6.5 per cent, up from an earlier forecast of 4.0 per cent.

Economic growth is expected to moderate after that, according to the central bank’s quarterly outlook report.

The improving conditions are why the bank also said on Apr. 21 that it will ease off federal government bond purchases which are part of its quantitative-easing program designed to aid the economy.

The Bank of Canada said it plans to keep up its efforts to help the economy until slack is absorbed and inflation is back at its two per cent target, which the central bank now sees happening later next year.

In the meantime, inflation is expected to hover at the top range of the bank’s comfort zone, but only because prices now are being compared with the weak levels seen one year ago at the onset of the pandemic.

Statistics Canada said on Apr. 21 that the consumer price index in March was up 2.2 per cent compared with a year ago, noting the year-over-year impact that should continue for the next few months.

The bank’s outlook for economic growth of 6.5 per cent this year, fuelled by consumer spending, is 2.5 percentage points higher than its last quarterly outlook and rosier than the 5.8 per cent predicted in the federal budget on Apr. 19.

Based on employment figures for March, the central bank estimated that about 300,000 more people would need to be hired to get back to pre-pandemic levels, or 475,000 when factoring in population growth.

The central bank’s forecast doesn’t take into effect the full suite of stimulus outlined in the federal budget as the central bank baked in $85 billion in spending rather than the $101 billion over three years in the Liberal’s plan.

In a statement, the bank’s governing council said “additional federal and provincial fiscal stimulus will contribute importantly to growth.”