Bank of Canada plans to keep interest rate near zero until 2023

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The Bank of Canada says it does not intend to change its benchmark interest rate until inflation returns to and stays at 2%, which it says does not happen. will probably not produce until 2023.The central bank announced on Wednesday that it had decided to keep its benchmark interest rate stable at 0.25%. The news was expected by economists, because although the economy is showing signs of recovery from the impact of COVID-19, things are still far from normal, so cheap loans will still be needed for a long time.

The bank presented a rather grim assessment of the worst-case scenario when it presented its last monetary report in July. But the roughly eight months since COVID-19 began in Canada has given the bank a clearer picture of how things are moving, even if the picture is not always rosy.

“With more than six months since the start of the pandemic, the Bank has gained a better understanding of how containment measures and support programs are affecting the Canadian and global economies,” the bank said.

“This, along with more information on medical developments related to COVID-19, allows the bank to now make a reasonable set of assumptions to support a baseline forecast. ”

Shaken by COVID-19, the central bank predicts that the Canadian economy will shrink 5.7% this year, but grow 4.2% next year and 3.7% in 2022. Inflation, however to it, should reach 0.6% this year,
1.0% next year and 1.7% in 2022.

However, these projections for growth and inflation are based on two acts of faith: that there will be no widespread second – or third – lockdown in Canada, and that a vaccine or some sort of effective treatment will largely be. available from the middle. 2022 at the latest.

“The scale and intensity of the reimposed containment measures, including impacts on schools and the availability of child care services, could lead to setbacks,” the bank said in the accompanying quarterly monetary policy report. the decision on rates.

Impact on mortgages

The outlook and the bank’s rate decisions have a real impact on Canadian borrowers and savers. Fixed rate mortgages are priced based on what’s going on in the bond market, but the central bank rate has a direct impact on variable rate mortgages.

So telegraphing that rates will stay low for a long time presents a sort of conundrum for borrowers, says James Laird, co-founder of Ratehub.ca and president of mortgage brokerage firm CanWise Financial.

“There is no wrong answer right now,” Laird said.

“Canadians who derive value from certainty should choose a fixed rate. For Canadians who are open to a little more risk, it is certainly appropriate to consider a variable rate, since the Bank is committed to keeping rates where they are for at least two years. ”

TD Bank economist Sri Thanabalasingam said the bank made it clear on Wednesday that the road to a full recovery will be slow.

“There is a long way to go for the Canadian economy to emerge from this crisis,” Thanabalasingam said.

“The way forward is full of uncertainties, most of which could delay resuming a step or two, [so] the bank should continue to provide monetary support for many years. ”

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