Bank of Canada holds rate steady, sees economy below pre-COVID-19 levels until 2022

OTTAWA: Canada's economic growth will not return to pre-pandemic levels until 2022, the Bank of Canada said on Wednesday, in an outlook that was cautious on US growth and assumed there would not be a global second wave of COVID-19.

The central bank also maintained its key overnight interest rate at 0.25%, its effective lower bound, and said it will hold rates there until economic slack is absorbed and its 2% inflation target is sustainably achieved.

"They've made it pretty clear that they're going to keep the pedal to the metal in terms of easy policy until the economy has recovered," said Doug Porter, chief economist at BMO Capital Markets.

The Bank said that its central scenario now sees Canadian oil production on a "considerably lower path than before the COVID-19 crisis," due to weaker investment in the face of reduced demand and low oil prices.

It noted that while its outlook assumes the pandemic will have largely run its course by mid-2022, much uncertainty remains in the interim, with the timing and strength of the global recovery varying by region, and an ongoing risk of regional flare-ups. "Overall, the risks appear to be tilted to the downside, largely because of the potential for a second wave of the virus," the central bank said.

The Canadian dollar held on to earlier gains after the rate decision, trading at about C$1.3570, or 73.69 US cents.

The Bank of Canada marked down its growth outlook for the United States, Canada's largest trading partner, noting "the resurgence in new COVID-19 cases since the middle of June is slowing the rebound as many states are scaling back their reopening plans."

The scenario showed Canada's economic growth falling in 2020, then rising in both 2021 and 2022, reaching pre-pandemic levels in early 2022.

It noted that after an initial bounce, growth will slow on the effects of social distancing, subdued consumer and business confidence, and "a slow rebound in foreign demand."

Due to the extreme uncertainty around the coronavirus pandemic, the central bank provided a "central scenario" for Canada's economy rather than its usual projections.