The Bank of Canada says the domestic economy will grow at a slightly slower pace this year than it previously thought and sees the risks from Covid-19 waning, but not enough to change its trendsetting policy rate.
The central bank said it expects the economy to grow 6.0% in 2021, down from its previous forecast of 6.5%. However, the bank now expects growth of 4.6% in 2022, up from its earlier forecast of 3.7%.
The reason for the shift has to do with a weaker first half of the year than the bank previously expected as the economy was hampered by lockdowns and restrictions.
With public health restrictions partially or entirely lifted across the country, the central bank now expects consumers to start spending more, including the $200 billion in savings Canadians accumulated during the pandemic.
The bank’s updated economic outlook also says spending shouldn’t be affected by a decline in federal aid as it expects more people to get back to work, meaning they earn more and offset declines in government assistance.
As a result, the bank kept its key policy rate on hold at 0.25% on Wednesday, where it has been since the onset of the pandemic.
The bank said it will keep the rate at near-zero until the economy is ready to handle an increase in rates, which it doesn’t expect to happen until the second half of 2022.
“Despite the downgrades and upgrades, it seems to come out in a wash for the monetary policy outlook, with the central bank continuing to signal that rates would be on hold at least until the second half of next year,” CIBC senior economist Royce Mendes wrote in a note.
The central bank also said that economic conditions have improved enough that it will reduce its weekly purchases of federal bonds to $2 billion from $3 billion.
The purchases are a stimulus measure designed to help drive down rates charged on mortgages and business loans.
In the scenario the bank laid out Wednesday, inflation runs above 3% for the rest of the year because of higher gasoline prices and service businesses raising prices as demand returns. Inflation also stays above the Bank of Canada’s two-per-cent target next year,
In a statement, the central bank said the factors pushing up inflation are likely to be short-lived, but will be closely monitored in case they become persistent or grow.
One reason the bank plans to let inflation run hot is because the country’s labour market needs to hire roughly 550,000 people just to reach pre-pandemic employment levels.
“Employment has once again begun to rebound, and we expect the hardest-hit segments of the labour market to post strong gains as the economy reopens.” the bank said in a statement.
“However, the pace of the recovery will vary among industries and workers, and it could take some time to hire workers with the right skills to fill jobs.”