Bank of Canada warns of higher inflation, trims bond-buying program

by EditorL

The Bank of Canada building is pictured in Ottawa June 1, 2010. (REUTERS/Chris Wattie )

OTTAWA (Reuters) -The Bank of Canada on Wednesday held interest rates steady and reduced its bond-buying program, saying the economy needed less help as it recovers from the COVID-19 pandemic, but warned that inflation would be higher than previously forecast in the near-term.

The central bank said economic growth should pick up in the third quarter of 2021 after being weaker than expected in the first half of the year.

It held its key overnight interest rate at a record low of 0.25%, as expected, and cut its weekly net purchases of Canadian government bonds to a target of C$2 billion from C$3 billion.

“This adjustment reflects continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook,” it said in a statement.

Separately, it said the third wave of COVID-19 had slowed Canada‘s economic growth.

“However, these negative effects are waning, and the downside risks associated with the pandemic have significantly diminished,” the Bank said in its summer monetary policy report.

Inflation is now expected to remain at or above 3% – the top of the central bank’s 1%-3% inflation control range – through the rest of 2021 on temporary factors related to the pandemic, easing back to the 2% target by 2022 as those factors fade.

Economists said that while the Bank had opened the door to the idea that higher inflation could be more sustained than expected, it still saw the pressure as transitory.

“There’s no indication that these strong inflation readings are forcing the bank to reevaluate their monetary policy,” said Josh Nye, senior economist at Royal Bank of Canada.

Indeed, the central bank maintained its forward guidance, reiterating that it expected economic slack would be absorbed at some point in the second half of 2022. It cautioned that estimated timings remain “highly imprecise.”

It now expects Canada‘s economy to grow 6.0% in 2021, down from its April forecast of 6.5%. It revised up the 2022 growth estimate to 4.6% from 3.7%.

Canada is assumed to achieve broad COVID-19 immunity in the third quarter of 2021, which will bolster consumer confidence.

The economic recovery is expected to become more broad-based and self-sustaining over the projection horizon, with a strong rebound in employment seen over the coming months.

The Canadian dollar was little changed on Wednesday, trading at 1.2510 to the greenback, or 79.93 U.S. cents.

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