The Bank of Canada on Wednesday said it expects interest rates to remain at current record lows until 2023, and that a second wave of coronavirus infections would have a pronounced impact on near-term economic growth.
The central bank held its key overnight rate at 0.25 per cent but tweaked its asset purchase program to shift towards longer-term bonds, which it says have a more direct influence on the borrowing rates most important for households and businesses.
While the central bank now expects a smaller economic contraction in Canada in 2020 than previously forecast, it also notched down its growth outlook for 2021. It did not change its outlook for 2022. It expects economic activity to return to pre-pandemic levels at the start of that year.
The Bank noted its projections assume new coronavirus outbreaks will be managed by targeted containment measures, but said the impacts could be more severe than anticipated. Deaths nationally topped 10,000 on Tuesday.
“There is a serious risk… that broader or more intensive restrictions could be required,” it said in its quarterly Monetary Policy Report.
The Bank of Canada also said it did not expect the output gap to close until 2023, and forecast overall inflation to remain below its 2 per cent target through 2022.
“The Governing Council will hold the policy interest rate at the effective lower bound (of 0.25 per cent) until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our current projection, this does not happen until into 2023,” it said in its rate decision.
The central bank said it expects quarterly growth patterns to be “unusually choppy” due to localized COVID-19 outbreaks and containment measures, along with varied rates of recovery across industries.
“I think it’s quite clear that they’re driving home the point that the economy will need stimulus both fiscal and monetary for quite some time,” said Douglas Porter, chief economist at the Bank of Montreal.
The Bank of Canada says it now sees the Canadian economy contracting by 5.7 per cent in 2020, then growing 4.2 per cent in 2021 and 3.7 per cent in 2022.