Bank of Canada Expecting Economy to Rebound In Second Half of 2021
The Bank of Canada has decided to maintain its key benchmark interest rate unchanged at 0.25% despite a bleak economic outlook for the next couple of months because it is confident things will get better later in the year.
Central banks often use interest rate changes to manipulate the market in times of severe upward or downward pressure. Usually, interest rates are reduced in tough economic times to make it easier for consumers and businesses to take on debt to keep the economy moving.
"Reducing the effective lower bound from its current level of 25 basis points to a lower but still positive number is one of those options to provide additional monetary stimulus," explained Bank of Canada governor Tiff Macklem.
That is why the key benchmark interest rate is as low as 0.25% in the first place as lockdowns, and quarantine restrictions related to the novel coronavirus pandemic have made business conditions very difficult.
There was some suggestion the Bank of Canada might increase interest rates due to its strong economic momentum towards the end of last year. However, as the second wave of infections hit, economic conditions were again suppressed, and the idea was shelved.
With vaccines beginning to be rolled out worldwide, the Bank of Canada is confident business will start to get back to basics in the second half of the year. "Consumption is forecast to gain strength as parts of the economy reopen and confidence improves, and exports and business investment will be buoyed by rising foreign demand," the Bank said in a statement.
"Beyond the near term, the outlook for Canada is now stronger and more secure than in the October projection, thanks to earlier-than-expected availability of vaccines and significant ongoing policy stimulus."
Another reason for optimism is that while some industries struggled throughout 2020, that was not universally the case. Businesses and industries that operate online boomed as more and more people began to spend most of their time at home.
The number of Netflix subscribers, for example, sky-rocketed last year. As of January 2021, the online entertainment company boasts over 200 million active, paid-up subscribers, of which 74 million are from Canada and the USA.
Additionally, home delivery platforms also had a grand time in 2020. Services like UberEats noted a "fundamental behavioural shift" in how people interact with online delivery services.
iGaming is another industry that thrived in 2020 due to people turning to online options to find entertainment. The Online Gambling Global Market Report, 2020-30 report, published on ResearchAndMarkets.com indicates iGaming grew into a $66.7-billion industry last year.
As a result, regulatory momentum has been building up in Canada to open up the iGaming market to allow online casinos in Canada to grow and succeed even more than they have done in the last 12 months.
Overall, the Bank of Canada expects the country's economy to grow by 4% in 2021, which does not entirely offset the 5.5% decline from last year, but it certainly helps. This, the Bank predicts, will be followed by further growth of 5% in 2022 before things slow down to more "normal" levels of around 2.5% from 2023 onwards.
It also expects inflation to remain within its "comfortable" band of around 2%, which will mean there is no need for increasing interest rates, so interest on variable mortgage rates will stay at an all-time low.
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