The Bank of Canada maintains rates at 0.25%, the reduction of stimuli will depend on the economic recovery

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The Bank of Canada today it kept its target for the interest rate at the effective lower limit of 0.25%, as expected. The bank rate remains at 0.5% and the deposit rate at 0.25%. This is reinforced and complemented by the quantitative easing program (QE) of the BoC, which remains at a rate of 2 billion dollars per week.

Monetary policy statement

The global economic recovery continued through the second quarter, driven by strong growth in the US, and had solid momentum heading into the third quarter. However, supply chain disruptions are restricting activity in some sectors and the increase in COVID-19 cases in many regions poses a risk to the strength of the global recovery. Financial conditions remain very accommodative.

In Canada, GDP contracted by around 1% in the second quarter, weaker than anticipated in the Monetary Policy Report July of the BoC. This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the automotive sector. Housing market activity fell back from recent highs, largely as expected. Consumption, business investment and public spending contributed positively to growth, with a growth in domestic demand of more than 3%. The employment recovered during June and July, and the sectors that had suffered the most from anti-virus measures contracted as public health restrictions eased. This is reducing inequality in the labor market, although considerable slack remains and some groups, particularly low-wage workers, are still disproportionately affected. The Bank of Canada continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and current supply bottlenecks could influence the recovery.

CPI inflation remains above 3%, as expected, driven by the effects of gasoline prices and supply bottlenecks related to the pandemic. These factors that drive inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be closely monitored.. Wage increases have been moderate to date and medium-term inflation expectations remain well anchored. Core inflation measures have increased, but less than the CPI.

The Governing Council considers that the Canadian economy still has considerable excess capacity and that the recovery continues to require extraordinary support from monetary policy. We remain committed to maintaining the policy interest rate at the effective lower limit until the economic slack is absorbed so that the inflation target of 2% is achieved in a sustainable manner.. In the BoC’s July projection, this happens in the second half of 2022. The QE program continues to reinforce this commitment and keeps interest rates low across the yield curve. The Decisions regarding future adjustments to the pace of net bond purchases will be guided by the Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation target.

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