Bank of Canada Forecasts Economic Rebound In Year’s Second Half

The Bank of Canada forecasts a strong economic rebound in this year’s second half as vaccinations against COVID-19 accelerate.

In a statement Wednesday, the central bank said the economy remains on a two-year timeline to fully recover from the pandemic and doesn’t currently need additional support, even amid a wave of new COVID-19 cases and provincial lockdowns.

The statement ends speculation that the Bank of Canada could further cut already historically low interest rates. Bank officials said the amount of stimulus already in the economy is appropriate and even raised the possibility of pulling back some of it as the recovery takes hold.

"In sum, there is clear reason to be more optimistic about the direction of the economy over medium term," Bank of Canada Governor Tiff Macklem told reporters after the interest rate decision.

The Canadian dollar extended gains following the decision, rising as much as 1% to its highest level since April 2018 against the U.S. dollar. The yield on government 10-year bonds rose three basis points to 0.84%.

The bank held its overnight interest rate at 0.25%, which is a record low. Interest rates that commercial banks give to their prime customers are typically just over two percentage points above the policy rate. The bank reiterated that it will keep borrowing costs low until 2023.

In addition, the central bank has been purchasing financial assets, primarily Canadian government bonds, to suppress long-term interest rates. Officials on Wednesday said they will continue to do so at the current pace of at least $4 billion per week.

But in perhaps the most significant addition to its policy statement, the central bank said it’s prepared to scale these purchases back as it becomes more confident the recovery has taken hold.

Macklem called the arrival of vaccines a "very promising development," one that will support exports and business investment as progress is made toward broad immunity in Canada and abroad. Widespread vaccination would also prove a boon for household consumption.

However, a second wave of COVID-19 cases has forced officials to impose strict measures on businesses and social gatherings that the Bank of Canada is predicting will produce an economic contraction in the first quarter of this year.