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The Bank of Canada is leaving its target for the overnight rate at 0.25 per cent.
Its stimulus program known as quantitative easing (QE) is being maintained at a target pace of $2 billion per week.
Despite weaker than expected GDP data that showed a contraction in the second quarter, Canada’s central bank says the economy remains on track for now. It blamed the contraction on supply chain bottlenecks and an expected housing market slowdown.
“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,” said the Bank of Canada in a release.
Today’s comments are something of a placeholder until October, when the Bank of Canada updates its forecast for economic growth, but the GDP data could not be ignored.
“Of course, it had to acknowledge that growth appears weaker than it had previously assumed, although it noted that the contraction in Q2 was 'largely' due to weakness in exports stemming from supply chain disruptions,” said CIBC economist Andrew Grantham.
“Those same bottlenecks, as well as base effects from the prior year, also factored into its continued assessment that the recent strength in inflation is ‘transitory’.”
Winding down QE
Economists could learn more about how QE will be wound down when Bank of Canada Governor Tiff Macklem gives a Thursday speech titled, "QE and the reinvestment phase".
“While the Bank of Canada prior to the calling of the election and the unexpected economic setback was setting up to begin pulling back further on the pace of its asset purchases, the rapidly expanding Delta variant and a modestly slower pace of economic expansion has likely temporarily derailed those plans,” said Joe Brusuelas, chief economist at tax, audit, and consultancy firm RSM.
“Moreover, the dent in consumer spending caused by pandemic and frictions inside supply chains pose risks to the second half pace of growth that the central bank is clearly focused. In our estimation the combination of the rapidly changing economic, policy and political environment has almost certainly pushed back a slowing in monetary accommodation and any chance of a rate hike until 2022.”
An eye on inflation
The Bank of Canada says like the economic slowdown, stronger inflation is temporary but something to keep an eye on.
"CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks," said the Bank of Canada.
"These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely."
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.