Bank of Canada holds rate at 0.25%

Bank of Canada holds rate at 0.25%

But not for long it warns - increases are looming

Canada's central bank decided to maintain its key interest rate at 0.25 per cent earlier today, but warned of impending increases.

The benchmark.0.25 rate has remained unchanged since March 2020, amid COVID 19's first wave with and ensuing economic downturn and the loss of 3 million jobs.

The economy's recovery since then has far surpassed expectations, especially in the last 3 or 4 months. The bank explained that economy is operating a full capacity and the job market is back to pre-pandemic numbers.

The BoC explained that the economic rebound is the main reason it can no longer vow to hold its policy rate at 0.25 per cent, adding that rates must increase to help pull inflation back down to the bank's two per cent target.

“Interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates,” said Bank of Canada governor Tiff Macklem.

The Omicron variant's rapid transmission was listed as an economic "wild card" , both domestically and internationally, and as another reason for the bank to hold its policy rate steady.

“Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that the rapid spread of Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged today, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward,” Macklem added.

In its updated economic outlook, the Bank of Canada cautioned that inflation is expected to eclipse five per cent in this year's first quarter, before moderating by end of year.

In its latest rate release, the central bank said it will do all it can to certify that “near-term inflation expectations do not become embedded in ongoing inflation.”

The Bank of Canada figures the economy expanded by 4.6 per cent last year, down half a percentage point from its preceding forecast last October, and now predicts growth in real gross domestic product to be at around four per cent this year, down from 4.3 per cent.