(The Canadian Press)

(The Canadian Press)

Bank of Canada holds rate, forecasts decline in GDP of 7.8% this year

The report pegs the annual inflation rate at 0.6 per cent this year

The Bank of Canada is holding its key interest rate at 0.25 per cent in response to what it calls the “extremely uncertain” economic outlook from the COVID-19 pandemic, and plans to keep it there until the picture improves.

In its updated outlook, the bank said Wednesday it expects the economy to contract by 7.8 per cent this year, driven downward by a year-over-year contraction of 14.6 per cent in the second quarter.

The report pegs the annual inflation rate at 0.6 per cent this year, rising to 1.2 per cent in 2021 and 1.7 per cent in 2022.

Its inflation target is 2 per cent, and the bank said in its policy statement it will maintain the current rate until that target is achieved.

The rate will have to stay low to provide “extraordinary monetary policy support” to help recuperate from the economic impact of COVID-19, it said.

The forecasts included in the Bank of Canada’s monetary policy report also come with a caution that the numbers could be thrown off.

The bank’s outlook is based on the assumption that there won’t be a broad-based second wave of the pandemic, that lockdowns will be gradually lifted, and the pandemic will have run its course by mid-2022 thanks to a vaccine or effective treatment.

The monetary policy report said there isn’t enough information to forecast how deep the economic scarring will be from business closures or widespread job losses.

It’s also unclear how quickly consumer demand will recover through changes in spending habits, work patterns and social behaviour, the report said.

Still, the central bank said it appears the country has avoided a worst-case scenario envisioned by the bank in its last report in April.

The central bank’s key interest rate has been at 0.25 per cent since March when it was rapidly dropped in response to the economic fallout from COVID-19.

Governor Tiff Macklem has seemingly ruled out any further drops and has said that the central bank doesn’t plan to raise the rate until well into an economic recovery.

The Bank of Canada’s June interest rate announcement came on Macklem’s first day on the job as the country’s top central banker. Though he was only observer during the June round of deliberations by the bank’s governing council, he endorsed the decision to keep the rate on hold.

The report Wednesday said growth will pick up beginning in this quarter, the third of the year, with the country recouping about 40 per cent of the drop in output from the first half of 2020.

Much of that will be driven by the reopening of businesses and partial rebound in spending, the bank says.

But after an initial, quick bounceback, Canada will enter what the bank calls a “recuperation phase” where the pace of recovery will slow.

“As reopening progresses, many people will probably continue to fear contracting the virus, and uncertainty about job security is likely to persist,” the report said.

“Both consumer and business confidence are therefore expected to remain subdued, restraining spending and employment, particularly in activities that involve in-person interaction.”

The bank said the pandemic will continue to affect consumer and business confidence during this phase amid widespread changes in the economy, including the energy sector where low prices and reduced demand have put production well below its pre-pandemic path.

As well, the shock facing the oil sector has “renewed questions about the likelihood of pipelines being developed,” the report said.

Some lower-income workers, disproportionately affected by job losses or cuts in earnings, “will face prolonged income losses” and push more households to the financial brink, the bank warns.

While higher income households may have excess savings to spend during this phase, some households will prioritize paying down debts, or padding rainy-day funds due to the uncertain economic environment, the report said.

Heavy discounts on unwanted inventory and smaller-than-planned price increases for firms will also act as a drag on inflation, which the bank expects to remain weak before gradually getting back to its two per cent target.

Housing activity is also expected to slow over the next few years with the ripple effects of the downturn, and lower immigration, the report said.

The central bank said it will provide a more detailed analysis of its long-run assumptions for the domestic economy when it updates it outlook in October.

Jordan Press, The Canadian Press

Like us on Facebook and follow us on Twitter.

Want to support local journalism? Make a donation here.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Interior Health reported 79 new cases of COVID-19 and two new death in the region Friday, Jan. 22, 2021. (Ben Hohenstatt/Juneau Empire)
79 new COVID-19 cases, two deaths reported in Interior Health

Both of Friday’s deaths were both recorded at long-term care homes

Vancouver Giants defenceman Bowen Byram could be playing for Colorado when the NHL resumes play. (Rik Fedyck/file)
Cranbrook product Bowen Byram makes NHL debut with Avalanche

Highly touted prospect marks first pro game following World Junior tournament in Alberta

Centre 64 in Kimberley. Bulletin file
Kimberley’s Centre 64 receives grant for building improvements

The Kimberley Arts Council/Centre 64 has just received notice that their grant… Continue reading

Teck sends impacted ground water from the former Sullivan Mine operations to the Drainage Water Treatment Plant on the St. Mary River. Photo courtesy Teck.
Teck will hold further information sessions on ground water issues in Kimberley

Ryan Peterson from Teck made a presentation on ground water issues to… Continue reading

Kootenay-Columbia MP Rob Morrison speaks during Question Period in the House of Commons. File photo.
MP Morrison calls Keystone XL permit cancellation ‘devastating news’

Kootenay-Columbia MP reacts to the Conservative Party’s removal of a controversial Ontario MP

Toronto Public Health nurse Lalaine Agarin sets up for mass vaccination clinic in Toronto, Jan. 17, 2021. B.C. is set to to begin its large-scale immunization program for the general public starting in April. THE CANADIAN PRESS/Frank Gunn
B.C.’s COVID-19 mass vaccinations expected to start in April

Clinics to immunize four million people by September

Sunnybank in Oliver. (Google Maps)
Sunnybank long-term care in Oliver reports third COVID-19 death

The facility currently has an outbreak with 35 cases attached to it

Chief Public Health Officer Theresa Tam speaks during a daily briefing in Ottawa. (THE CANADIAN PRESS/Adrian Wyld)
31 cases of COVID-19 variants detected in Canada: Health officials

Dr. Theresa Tam made announces 13 more variant COVID-19 cases in Canada

Royal Inland Hospital in Kamloops. (Dave Eagles/Kamloops This Week file photo)
COVID-19 outbreak declared at Kamloops’ Royal Inland Hospital surgical unit

Despite 6 South being a surgical unit, RIH said surgeries are continuing at the hospital

Join Black Press Media and Do Some Good
Join Black Press Media and Do Some Good

Pay it Forward program supports local businesses in their community giving

Daily COVID-19 cases reported to each B.C. health region, to Jan. 20, 2021. Island Health in blue, Northern Health green, Interior Health orange, Vancouver Coastal in red and Fraser Health in purple. (B.C. Centre for Disease Control)
B.C.’s COVID-19 infection rate stays stable with 508 cases Friday

Vaccine delivered to more than 110,000 high-risk people

Volunteer firefighters from Grand Forks Fire/Rescue head towards the scene of fatal car crash near Gibbs Creek Road, below Highway 3, Thursday evening, Jan. 21. Photo: Laurie Tritschler
Motorist dies in Highway 3 crash west of Grand Forks

City first responders were called to the scene Thursday evening, Jan. 21

The District of Saanich’s communications team decided to take part in a viral trend on Thursday and photoshopped U.S. Senator Bernie Sanders into a staff meeting photo. (District of Saanich/Twitter)
Bernie Sanders makes guest appearance municipal staff meeting in B.C.

Vancouver Island firefighters jump on viral trend of photoshopped U.S. senator

School District 57 headquarters in Prince George. (Mark Nielsen, Local Journalism Initiative Reporter)
Prince George school district settles with sexual abuse victim

Terms were part of an out-of-court settlement reached with Michael Bruneau, nearly four years after he filed a lawsuit

Most Read