June 3, 2020 / 2:39 PM / a month ago

UPDATE 2-Bank of Canada holds rates steady, says COVID-19 impact has likely peaked

(Adds economist quote, details)

By Kelsey Johnson and Julie Gordon

OTTAWA, June 3 (Reuters) - The Bank of Canada held its key overnight interest rate steady on Wednesday and said the impact of the coronavirus pandemic on the global economy appears to have peaked, while the Canadian economy seems to have avoided worst-case scenario projections.

The decision to hold rates came on the same day new governor Tiff Macklem took helm of the central bank. The bank slashed rates three times to a record low 0.25% in March and launched its first ever large-scale bond buying program in response to the coronavirus pandemic and low oil prices.

“In Canada, the pandemic has led to historic losses in output and jobs. Still, the Canadian economy appears to have avoided the most severe scenario,” the bank said in its release.

It added that while the outlook for the second half of the year and beyond remains “heavily clouded,” it now expects the Canadian economy to resume growth in the third quarter.

“I wouldn’t describe it as an upbeat tone. But it’s less negative than perhaps feared,” said Douglas Porter, chief economist at the Bank of Montreal.

The Canadian dollar held near a three-month high at 1.3476 per U.S. dollar or 74.21 U.S. cents.

The Bank noted that Macklem, a long time central banker and former dean of a prominent Canadian business school, observed the deliberations and endorsed the rate decision. He takes over from former Governor Stephen Poloz, who retired on Tuesday.

The Bank said that given improved market functioning, it would reduce the frequency of its term repo operations to once per week and its program to buy bankers’ acceptances to bi-weekly.

It also said it expects the level of real GDP in the second quarter to show a further decline of 10-20%, as widespread shutdowns and lower energy investment continue to hit output.

Money markets do not expect further rate moves this year. (Additional reporting by Steve Scherer in Ottawa, Fergal Smith, Nichola Saminather and Moira Warburton in Toronto Editing by Chizu Nomiyama and Marguerita Choy)

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