Bank of Canada Announcement: How COVID-19 continues to Impact the Economy

Posted on 15 July, 2020

What Does the Bank of Canada do?
Eight times per year, the Bank of Canada (BoC) makes an announcement about their benchmark lending rate based on data they have assessed about the current state of the Canadian economy. Any change to this rate indicates a possible change to corresponding rates, such as interest rates for mortgages and additional types of consumer loans. This is because the rate set by the bank will directly affect prime rates offered by banks and other financing lenders. For more information, our recent blog post breaks down four of the most frequently asked questions regarding the BoC.

Were there any Changes to the Interest Rate?
The Bank of Canada continues to maintain its benchmark rate at the effective lower bound of 0.25 percent. Along with the rate announcement that took place this morning, the central bank also released its latest Monetary Policy Report (MPR). Due to the ongoing uncertainty around the unfolding of the COVID-19 pandemic, the bank opted to present a “central scenario for global and Canadian growth” in lieu of the usual economic projections outlined in the MPR.

What Information did the Bank Share about the Economy?

The central scenario in the MPR operates under several assumptions, including:

  • That there will be no significant second wave of the virus on either a national or global scale;
  • Due to the availability of an effective treatment or vaccine for COVID-19, the virus will have predominantly run its course by mid-2022; and
  • Large-scale restrictions will continue to be lifted gradually.

Global Economic Considerations

  • With these assumptions in mind, the bank estimates a five percent decrease in the global economy in 2020 followed by five percent average growth in both 2021 and 2022.
  • On a global scale, the bank continues to expect that recovery will vary across regions due to the possibility of “a resurgence of infections and the limited capacity of some countries to support their economies.”
  • Economic activity is picking up across the globe, following the lifting of restrictions that were put in place to contain the virus.
  • This increase in activity has improved financial conditions, including an increase in the price of most commodities. Notably, the price of oil is currently rebounding from historic lows.

Within Canada

  • The second quarter of 2020 is estimated to have seen the “deepest decline in activity since the Great Depression, but considerably less severe than the worst scenarios presented in the April MPR.” The bank projects a 15 percent decrease in economic activity in comparison with the end of 2019.
  • The implementation of support programs and the extension of others, where necessary, continues to offset disruptions in income and credit and has provided a solid foundation for recovery.
  • Preliminary numbers suggest that there is a rebound in both employment and output due to the gradual reopening of the economy.
  • In the central scenario, the bank expects that around forty percent of the economic breakdown that occurred in the first half of 2020 will recover by the end of the third quarter.
  • Real GDP is estimated to decline by 7.8 percent in 2020, and grow by 5.1 percent in 2021 and 3.7 percent in 2022.

covid-19 recovery phases

  • Currently, Canada is in the ‘reopening’ phase of recovery. The central bank expects the Canadian economy to require significant support and continued stimulation through monetary policy.
  • CPI inflation remains near-zero, with core inflation sitting between 1.4 and 1.9 percent.
  • The bank continues to make large-scale asset purchases, acquiring a minimum of $5 billion per week of Government of Canada bonds. This quantitative easing (QE) program helps to make borrowing more affordable for both households and businesses. This program is expected to remain in place until “recovery is well underway.”

Will there be any Interest Rate Changes in the Near Future?
The bank “will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.” The next announcement is set for September 9, 2020.

How Can I Learn More?
For up-to-date information on interest rates and other mortgage news, you can follow us on Facebook, Instagram or LinkedIn. Questions about today’s announcement? Leave a comment below, or contact our office and speak to one of our Mortgage Brokers today!

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