Bank of Canada keeps key rate at 0.25%, maintains QE policy

OTTAWA (Reuters) -The Bank of Canada on Wednesday left its key interest rate unchanged at 0.25%, as expected, and said it would maintain its current policy of quantitative easing, balancing the ongoing COVID-19 risks against vaccine optimism.

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

The central bank, in a statement outlining its final rate decision of 2020, reiterated that rates would remain at their effective lower bound until economic slack is absorbed, which will not happen until into 2023 under its current projections.

Those projections were made before recent developments in the race for a COVID-19 vaccine. The Bank said the vaccine news was “providing reassurance that the pandemic will end,” but added that uncertainty remained around the global rollout.

“No real surprises,” said Andrew Kelvin, chief Canada strategist at TD Securities. “They are taking a wait and see approach on the impact of COVID(-19) on the economy this winter and on the roll out of vaccines.”

The central bank did note that Canada’s economic momentum appeared stronger than expected heading into the fourth quarter, but added record levels of COVID-19 infections were set to weigh on growth in the first quarter of 2021.

That has all eyes on January, when the governing council will update projections set out in October. If vaccine rollouts go well, economists expect there could be some changes to the forward guidance.

“All the vaccine development has been positive,” said Derek Holt, vice president of capital markets economics at Scotiabank. “We have forecast the output gap shutting by the middle of 2022, so materially earlier than the Bank’s suggesting.”

“I think they probably will continue to taper their bond purchase amounts as the first half of next year unfolds,” he added.

The Bank of Canada also noted that stronger demand was pushing up oil prices and seemingly shrugged off the recent strength of the Canadian dollar, attributing it to a broad-based decline in the U.S. exchange rate.

The loonie was trading 0.1% higher at 1.2803 to the greenback, or 78.11 U.S. cents.

Reporting by Julie Gordon; Additional reporting by David Ljunggren, Fergal Smith, Jeff Lewis and Steve Scherer; Editing by Chizu Nomiyama and Bernadette Baum