Preview: the Bank of Canada rate decision

One of the must-watch economic events this week will be the Bank of Canada interest rate decision. The rate decision is due to be announced at 15:00 PM London time on Wednesday.

Why is the announcement important?

A bank interest rate is a rate at which a country’s central bank lends money to local banks. The interest rate is charged by the nation’s central or federal bank on loans and advances to control the money supply in the economy and the banking sector. The Bank of Canada has an inflation target of 1% to 3% (currently 1%). The interest rates are changed accordingly to meet the target. The decision to increase, decrease, or maintain the interest rate has a significant impact on the financial markets so it is one of the most closely watched economic events in the calendar.

Bank of Canada interest rate changes since 2015

Expectations

All eyes will be on the Bank of Canada governor, Tiff Macklem on whether the interest rate remains unchanged at 0.25% or reduced closer to 0%. Canada has had one of the strictest lockdown measures in the world in its fight to defeat the Coronavirus in recent months, which has had a considerable impact on the country’s economy.

Despite that, the rates are expected to remain unchanged, according to economists.

Brett House, vice-president, and deputy chief economist at Scotiabank:

”We do not expect a rate cut from the Bank of Canada at its next meeting as rate-sensitive sectors don’t need an additional boost. For instance, Governor Macklem noted before the holidays that we should watch how housing is faring … Canadian home sales were up 7.2 per cent month-over-month in December to set a record for the month, which completed an annual gain of 12.6 per cent year-over-year. In other areas, retail sales have been above year-ago levels for several months.”

”Although some immediate risks to the economy have gone up with intensified restrictions to stem the spread of COVID-19, medium-term risks relevant for setting monetary policy have abated. Vaccines are being delivered about a year ahead of the Bank of Canada’s earlier expectations; the U.S. stimulus and funding bill passed and a government shutdown was averted, which will provide some positive spillover effects into Canada; and financial conditions remain favourable to growth.”

The Monetary Policy Report is set to be released shortly after the rate decision.