Bank of Canada Says Impact of COVID on Economy Has “Peaked”

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The Bank of Canada says it has kept its key interest rate target on hold as it believes the economy has avoided its “worst-case scenario” due to the pandemic. The Bank said Wednesday its target for the overnight rate will now remain at 0.25%.

According to the Bank, the impact of the COVID-19 pandemic on the economy appears to have “peaked,” though uncertainty about how the recovery will unfold remains high.

Here in Canada, the pandemic has led to historic losses in output and jobs, yet the Bank says the Canadian economy appears to have avoided the most “severe scenario” presented in the Bank’s April Monetary Policy Report (MPR).

READ: Bank of Canada Says COVID-19 Downturn Will Be “Sharpest” on Record

In turn, the Bank is now updating its GDP figures for the second quarter of the year and says it expects GDP to decline between 10 and 20%, as “continued shutdowns and sharply lower investment in the energy sector take a further toll on output.”

“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery,” reads the latest announcement from the Bank.

However, while the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank says it expects the economy to resume growth in the third quarter.

READ: Canadian GDP Dropped 8% in First Quarter in Wake of COVID

On a global level, the Bank says policy responses in advanced economies have helped to replace the lost income and cushion the effect of economic shutdowns, while financial conditions have improved and commodity prices have risen in recent weeks after falling sharply earlier this year. Because different countries’ containment measures will be lifted at different times, the Bank says the global recovery likely will be protracted and uneven.

“As expected, the Bank of Canada has maintained the target overnight rate at 0.25 percent. The Bank’s announcement indicated that they believed the impact of COVID-19 has peaked in the current quarter. However, the economic recovery is still to follow,” said James Laird, co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage.

“The historically low mortgage rates currently in the market are here to stay until the economy approaches the level it was at before the pandemic started. This means that anyone with a variable rate can expect prime to remain unchanged. Fixed rates will stay near historic lows,” added Laird.

As market function improves and containment restrictions ease, the Bank says its focus will shift to supporting the resumption of growth in output and employment. Additionally, the Bank says it will maintain its commitment to purchasing large-scale assets until the economic recovery is well underway.

“Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target,” said the Bank.

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