First National Financial LP

Bank of Canada holds benchmark interest rates steady

  • First National Financial LP

 The Bank of Canada made its sixth interest rate decision of the year and for the sixth time, left its overnight benchmark rate unchanged at 0.25%. This low rate has been in force since March 2020.  As a result, the Bank Rate stays at 0.5%.  

The Bank also made some new comments on the state of the economy at home and abroad as summarized below:

Global economy

  • The economic recovery continued through the second quarter, led by strong US growth
  • While the global economy “had solid momentum heading into the third quarter,” supply chain disruptions are restraining activity in some sectors
  • Rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery

Canadian housing & economic performance

  • The economy is expected to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery
  • However, GDP contracted by about 1% in the second quarter – this performance was weaker than anticipated in the Bank’s July Monetary Policy Report, largely reflecting a contraction in exports, due in part to supply chain disruptions, especially in the auto sector
  • Housing market activity pulled back from recent high levels, largely as expected
  • Employment rebounded through June and July, with “hard-to-distance sectors” hiring as public health restrictions eased
  • “Unevenness” in the labour market is reducing, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected

Canadian inflation

  • CPI inflation remains above 3% as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks
  • Factors pushing up inflation are expected to be transitory, “but their persistence and magnitude are uncertain and will be monitored closely”
  • Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored
  • Core measures of inflation have risen, but by less than the Consumer Price Index

Outlook: stimulus continues

The Bank’s Governing Council believes that the Canadian economy still has “considerable” excess capacity, and that the recovery continues to require “extraordinary monetary policy support.”

Therefore, it remains committed to holding its policy interest rate at what the Bank calls the “effective lower bound” until 2% inflation is “sustainably achieved.” In the Bank’s July projection, this happens in the second half of 2022. (Of note, no update on expected timing was offered in today’s announcement.) The Bank's quantitative easing program continues to reinforce this commitment and results in keeping interest rates low across the yield curve.

Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery. The Bank pledged to continue to provide the “appropriate degree of monetary policy stimulus” to support the recovery and achieve its 2% inflation objective. This stimulus currently includes $2 billion of bond repurchases per week.

A good time to borrow

With the benchmark rate unchanged, and employment rebounding, conditions remain favourable for all types of property financings.

The BoC’s next scheduled policy announcement is October 27, 2021. Please watch for First National’s follow-on Executive Summary.