Bank of Canada on hold as growth proves weaker than expected

The Bank of Canada kept its main monetary policy tools on hold today (September 8), noting a disappointing growth figure in the second quarter.

The central bank kept its target for the overnight rate at 0.25%, which it judges to be the effective lower bound. It is continuing quantitative easing at a rate of C$2 billion (US$1.6 billion) a week.

Canadian GDP contracted about 1% in the second quarter, weaker than the bank’s forecasts. The BoC said the contraction was largely driven by a drop in exports, which have been hit by global supply chain disruptions. Consumption, investment and government spending all remain supportive of growth.

The labour market is also recovering, the central bank said, but some groups, particularly low-wage workers, are “disproportionately affected”.

“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,” it said.

Policy-makers have promised to keep rates at the lower bound until economic slack is used up and inflation “sustainably” reaches the 2% target. At present, the BoC expects this to happen in the second half of 2022.