The Bank of Canada says the economy has avoided the "worst case scenario," and the impact of the coronavirus pandemic has likely peaked throughout the country.
The central bank made the comments on Wednesday when announcing that it is leaving its benchmark interest rate unchanged at 0.25%. The decision to hold interest rates steady was widely expected by economists and analysts.
In a new outlook on the Canadian economy, the Bank of Canada struck a more optimistic tone, adjusting its forecast for second quarter Gross Domestic Product (GDP) to a less severe contraction.
The central bank also said it is shifting its focus toward supporting the economy rather than financial market functioning, and that it will begin winding down some market operations and stimulus measures that have been injected into the economy.
"This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high," the Bank of Canada said in a statement. "Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery."
The central bank now estimates that the economy will drop another 10% to 20% in the second quarter, after a 2.1% decline in the first three months of this year. That suggests a peak-to-trough decline of 12% to 22%, instead of a 15% to 30% scenario the central bank had previously estimated.
"The Canadian economy appears to have avoided the most severe scenario," the Bank of Canada said. "Any further policy actions from the bank will be targeted at maintaining the 2% inflation target."
The interest rate decision was the last under Governor Stephen Poloz. New Bank of Canada Governor Tiff Macklem participated as an observer during the deliberations. The Canadian dollar reversed losses on the decision and was trading 0.2% higher at $1.3489 against the U.S. dollar. Yields on Canadian government two-year bonds rose two basis points to 0.32% on the interest rate decision.
