First National Financial LP

Bank of Canada holds benchmark interest rates steady, publishes quarterly outlook

  • First National Financial LP

In a widely anticipated announcement, the Bank of Canada published its quarterly Monetary Policy Report today containing updated economic growth and inflation projections and made its fifth interest rate decision of the year.

The interest rate announcement was a non-event: The Bank of Canada left its target overnight benchmark rate unchanged at 0.25%. As a result, the Bank Rate stays at 0.5%.  

But beyond these headline numbers, the Bank made several key observations and noted that it is modifying its bond buying activity. We summarize the BoC’s statements below:

Canadian economic conditions

  • GDP growth for 2021 is now projected at 6%– a little slower than the Bank’s outlook in April –

    but has revised upward its 2022 forecast to 4.25% and projects 3.25% growth in 2023

  • Higher projected domestic demand in 2022 and 2023 is expected to reflect household spending (the Bank assumes households will spend 20% of the extra savings they have accumulated during the pandemic) as well as improved business confidence and investment
  • Consumption is expected to lead the rebound with increases in spending on transportation, recreation, and food and accommodation services
  • The economic recovery is expected to become more broad-based and self-sustaining over the Bank’s projection horizon
  • Housing market activity is projected to “ease back from historical highs”
  • Stronger international demand should underpin “a solid recovery in exports”
  • The pace of recovery will vary among industries and workers and it could take some time to hire workers with the right skills to fill jobs


  • CPI inflation was 3.6% in May reflecting “temporary factors” including the comparison to last year’s depressed economic output – referred to as “base year effects” – stronger gasoline prices and “pandemic-related bottlenecks” as economies reopen
  • Core measures of inflation have also risen but by less than the CPI
  • Inflation is likely to remain about 3% through the second half of 2021 but “ease back” toward 2% in 2022 as short-run imbalances diminish and overall slack in the economy pulls inflation lower

Global conditions

  • Global GDP growth is expected to reach 7% this year and then moderate to around 4.5% in 2022 and just over 3% in 2023 – this is slightly stronger than the forecast the Bank included in its April 2021 Monetary Policy Report owing to the outlook for the US economy
  • The recovery from the COVID-19 pandemic reflects continued vaccination progress particularly in advanced economies – however, the Bank still notes the recovery is “highly uneven” and the recent spreads of new COVID-19 variants is “a growing concern”

Quantitative easing – bond buying begins to taper

The Bank reiterated that it would continue its Quantitative Easing program to keep interest rates low across the yield curve but that it would reduce its weekly bond buying program to $2 billion per week from the previous $3 billion, an adjustment it said “reflects continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.”

The Bank said that future decisions on the pace of net bond purchases will be guided by its ongoing assessment of the strength and durability of the recovery. However, it pledged to continue to provide “the appropriate degree of monetary policy stimulus” to support the recovery and achieve its inflation objective.

Looking forward

The Bank’s Governing Council believes that the Canadian economy still has considerable excess capacity. Accordingly, it intends to hold its policy interest rate at the effective lower bound and will do so until economic slack is absorbed so that its 2% inflation target is “sustainably achieved.”

A good time to borrow

With the benchmark rate unchanged, and the economic recovery expected to gather steam, conditions remain favourable for all types of property financings. For borrowers, a key consideration is how long these low interest rates will last. No one, not even the Governor of the Bank of Canada, knows for sure, so it pays to act with a long-term strategy in mind.

The BoC’s next scheduled policy announcement is September 8, 2021. Please watch for First National’s follow-on Executive Summary.