Bank of Canada leaves rates unchanged
On December 9th, The Bank of Canada announced it would maintain its target overnight rate at the effective lower bound of ¼ percent. This is how The Bank controls short-term rates like the Prime Rate and variable mortgage rates.
The Bank is also buying Canadian government bonds as part of a quantitative easing (QE) program and this should keep long-term rates like the 5-year mortgage rate low. However, The Bank has not committed to a specific target for long-term rates. Since August, the yield on a 5-year Government of Canada bond has risen from 0.30% to 0.50%.
This may not seem like a large change in rates, but it raises the cost of borrowing by 67%. When borrowers begin from a point where there are low interest costs. Increases in costs are felt more keenly.
A rebound in the Canadian economy has unfolded largely as the Bank had anticipated and positive news on the development and distribution of vaccines is providing reassurance that the pandemic will end.
In the near term, new waves of infections are expected to set back recoveries in many parts of the world, so The Bank of Canada will continue to provide support. In recent weeks, record high cases of COVID-19 in many parts of Canada are forcing re-imposition of restrictions. This can be expected to weigh on growth in the first quarter of 2021 and contribute to a choppy trajectory until a vaccine is widely available.
The first COVID-19 vaccine shipments arrived in Canada on December 13th. All the provinces have announced a phased vaccination approach and B.C. has provided the most specific timeline to full vaccination and return to normal. B.C.’s Provincial Health Officer, Dr. Bonnie Henry, says that by September 2021, everyone who wants a vaccine will have received one.
Once the economy re-opens unrestricted, we can expect an unprecedented boom in economic activity but until then rates will likely stay low.
