Bank of Canada holds rates, still sees economic recovery in second half

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa
FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

September 8, 2021

By Julie Gordon

OTTAWA (Reuters) -The Bank of Canada left rates unchanged on Wednesday and said it expects growth to strengthen in the second half following a shock contraction last quarter, though a fourth wave of COVID-19 and supply bottlenecks could weigh on the recovery.

As expected, the central bank left its key interest rate at a record low 0.25% and maintained its current quantitative easing program, in a regular rate decision less than two weeks ahead of a hotly contested https://www.reuters.com/world/americas/canadas-trudeau-trailing-polls-goes-attack-two-weeks-before-vote-2021-09-06 federal election.

“The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery,” the Bank of Canada said in a statement.

The central bank kept its guidance that economic slack would be absorbed sometime in the second half of 2022, even with the surprise economic contraction in the second quarter and a softer start to the third quarter.

“I detected a hint of cautious optimism that the soft patch we’re going through is something they’re prepared to look through,” said Derek Holt, head of capital market economics at Scotiabank.

“For now they’re still planning that first rate hike to happen … sometime in the second half of 2022,” he added.

Canada’s economy unexpectedly shrank in the second quarter, data showed last week, and a preliminary estimate for July showed another contraction, putting economic activity https://www.reuters.com/business/canadian-economy-shrank-11-q2-july-gdp-seen-down-04-2021-08-31 front and center on Canada’s campaign trail.

Analysts said the central bank’s statement was unlikely to cause ripples ahead of the Sept. 20 vote, a race between the ruling Liberals and their main rival https://www.reuters.com/article/us-canada-election-o-toole-newsmaker/slow-and-steady-may-win-the-race-canada-opposition-leader-seeks-to-dethrone-trudeau-idUSKBN2G40ZT Conservatives.

“The Bank has probably gone about as far as they could to stay out of the election, and to make this as neutral a statement as possible,” said Doug Porter, chief economist at BMO Capital Markets.

The Canadian dollar was trading 0.8% lower at 1.2748 to the greenback, or 78.44 U.S. cents, its second day of sharp declines.

($1 = 1.2691 Canadian dollars)

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith and Nichola Saminather in Toronto and Nia WilliamsEditing by Nick Zieminski)