The Bank of Canada keeps its benchmark interest rate at the low of the new crown virus, but gradually reduces other stimulus measures

The Bank of Canada kept its benchmark interest rate unchanged at 0.25% on Wednesday and pointed out that although the economy is improving with vaccination, the specter of the mutation of the coronavirus has made the recovery uncertain.

The Bank of Canada said on Wednesday that it has no plans to raise its benchmark interest rate, the overnight rate target, until the Canadian inflation rate shows signs of stabilizing around 2%.

Official data show that the inflation rate is currently at 3.4%, the highest level in 10 years, but the bank believes that the surge is only temporary. Once there is a “temporary” imbalance in supply and demand, the inflation rate will return to a more normal range. Consumer goods, transportation bottlenecks and global semiconductor shortages have stabilized.

“In the central bank’s July forecast, this will happen sometime in the second half of 2022,” the bank said, which means it expects to keep interest rates unchanged for at least a year or so.

“The global economy is recovering strongly from the COVID-19 pandemic, and there is continuous progress in vaccination, especially in advanced economies. However, the recovery is still highly uneven and still depends on the progress of the virus.”

The bank’s benchmark interest rate affects the interest rates that borrowers and depositors receive from retail banks, such as floating-rate mortgages, credit lines, and savings accounts. All things being equal, the central bank will lower interest rates when it wants to encourage spending and investment to stimulate the economy. When it wants to cool inflation, it raises it.

Remove some irritation

Although the bank’s decision on Wednesday made it clear that it is comfortable to keep interest rates stable, it is still getting rid of the stimulus throttle in other ways.

In the early days of the pandemic, the bank developed a series of bond purchase plans, all of which were designed to maintain the money supply and keep the bank’s low-interest loans so that they could pass on these savings to consumers. The central bank, known as “quantitative easing,” once bought bonds worth up to 5 billion U.S. dollars a week to keep funds flowing.

When the bank last met, it reduced these purchases to $3 billion a week. On Wednesday, it slowed down again, dropping to $2 billion a week.

This will not have a huge impact on consumers or borrowers, but it is a signal that the Central Bank of Canada believes it is time to start considering how to slowly lift some of the emergency measures taken in response to the unprecedented pandemic.

The bank said: “The decision to further adjust the speed of net bond purchases will depend on the management committee’s continuous assessment of the strength and durability of the recovery.” “We will continue to provide an appropriate level of monetary policy stimulus to support the recovery and achieve the inflation target. “

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