This morning, in its second announcement of 2021, the Bank of Canada left its target overnight benchmark rate unchanged at 0.25%. As a result, the Bank Rate stays at 0.5%.
Prior to the announcement, there was some speculation that the Bank would signal its intention to begin tapering asset purchases that have been the central feature of monetary policy since the global pandemic began one year ago. It did not follow this course.
In fact, the Bank announced it is maintaining its extraordinary forward guidance, “reinforced and supplemented by its quantitative easing (QE) program, which continues at its current pace of at least $4 billion per week.”
Nevertheless, the BoC did make some encouraging statements about the state of the economy. Here is a summary:
Canadian economic conditions
- GDP grew 9.6% in the final quarter of 2020, led by strong inventory accumulation
- GDP growth in the first quarter of 2021 is now expected to be positive, which is different than what the Bank forecast in January
- The economy is proving to be more resilient than anticipated to the second wave of the virus
- Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected
- Although activity in “hard-to-distance” sectors continues to be held back, recent data point to continued recovery in the rest of the economy
- Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment
- Oil and other commodity prices have risen
- The Canadian dollar has been relatively stable against the US dollar but has appreciated against most other currencies
Global & U.S. economic conditions
- The global economy is recovering from the economic effects of COVID-19, “albeit with ongoing unevenness across regions and sectors”
- The US economic recovery appears to be gaining momentum as virus infections decline and fiscal support boosts incomes and consumption
- New fiscal stimulus will increase US consumption and output growth
- Global yield curves have steepened, largely reflecting the improved US growth outlook, but global financial conditions remain “highly accommodative”
Inflation
The Bank reported that inflation measured by the Consumer Price Index is near the bottom of its 1% to 3 % target band but is likely to move “temporarily” to around the top of the band in the next few months. This stands to reason as the prices of some goods and services fell precipitously at the outset of the crisis and are now recovering. Measures of core inflation currently range from 1.3% to 2%.
Once this inflationary period ends, the BoC expects CPI inflation to moderate as “base-year effects dissipate and excess capacity continues to exert downward pressure.”
Looking forward
Despite some encouraging signals, the Bank noted that there is still considerable economic slack in the system “and a great deal of uncertainty about the evolution of the virus and the path of economic growth.” The Bank sees the spread of more transmissible variants of the COVID-19 virus providing the “largest downside risk to activity.” To no one’s surprise, it also observed that localized outbreaks and lockdown restrictions “could contain growth” and “add choppiness” to the recovery.
It also noted that the Canadian labour market is “a long way from recovery,” with employment still well below pre-pandemic levels. Low-wage workers, young people and women have “borne the brunt of the job losses” according to the Bank.
As a result of its analysis, BoC’s Governing Council remains of the view that the economic recovery continues to require extraordinary monetary policy support in the form of a continuation of its Quantitative Easing program.
The bottom line
The Bank remains committed to holding its policy interest rate at the effective lower bound until economic slack is absorbed so that its 2% inflation target is “sustainably achieved.” In the Bank’s January projection, this does not happen until sometime in 2023.
To reinforce this commitment and “keep interest rates low across the yield curve,” the Bank will continue its QE program until the recovery is well underway.
BoC’s next scheduled policy announcement is April 21, 2021 and will be accompanied by the release of the Bank’s latest Monetary Report.