Canada's central bank maintains interest rates, forecasts GDP contraction in Q1

Canada's central bank left interest rates unchanged at its first policy meeting in 2021 and projected negative economic growth for the first quarter due to a resurgence of COVID-19 cases and reinforcement of lockdown measures.

The Bank of Canada maintained the target for the overnight rate at 0.25% and kept the bank rate and deposit rate at 0.5% and 0.25%, respectively. The central bank also said it will continue its quantitative easing program at its current pace of at least $4 billion per week.

"The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved," which is not expected to happen until into 2023, the central bank said.

The QE program will also continue until the recovery from the economic fallout from the pandemic is "well underway," the bank added.

"We remain committed to providing the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective," the central bank said.

The central bank expects the economy to contract in the first quarter of 2021 despite strong momentum toward the end of 2020. Still, the bank projects the economy to rebound by 4% in 2021 following a 5.5% contraction in 2020.

"Assuming restrictions are lifted later in the first quarter, the Bank expects a strong second-quarter rebound," the central bank said.

The outlook for Canada is "stronger" and "more secure" than the projection in October 2020 because of an earlier-than-expected availability of vaccines and significant ongoing policy stimulus, according to the central bank.