Bank of Canada's view on economic recovery
The Bank of Canada has made a long-term commitment to keep interest rates at historic lows, and will use its policy decision Wednesday to reinforce that guidance.
That means holding its overnight interest rate at 0.25 per cent, reiterating it will likely keep it there for years and pledging to continue buying government bonds. The bank releases its rate setting and Monetary Policy Report at 10 a.m. in Ottawa. Governor Tiff Macklem will give a press conference at 11 a.m.
The central bank’s extraordinary measures have helped Canada emerge more quickly than expected from the worst of the economic crisis. It’s unlikely Macklem will choose to make any significant changes to the playbook now, with risks rising as the country enters a second wave of COVID-19.
“I don’t think there will be any change in policy at all, not for rates and no drastic changes to the pace of purchases,” Veronica Clark, an economist at Citigroup Global Markets Inc., said by phone, adding the central bank will probably raise its third-quarter growth forecast. “Of course with virus cases rising and businesses having to close again, that’s a downside risk,” she said.
The Bank of Canada has committed to keeping its overnight rate at near zero until economic slack is absorbed and the 2 per cent inflation target is sustainably achieved -- something that could take years. It has also pledged to buy a minimum of CUS$5 billion (US$3.8 billion) a week in government bonds under its quantitative easing program.
It’s an extremely accommodative stance to help pull Canada out of the deepest downturn since the Great Depression. But risks are beginning to appear. In particular, the bank’s asset purchase program is threatening to corner the country’s government bond market.
The central bank already owns about a third of Canada’s federal government debt, and officials are under pressure to provide some details on how they could temper reliance on asset purchases without tightening policy.
“The larger their share the more complicated their exit plan,” Frances Donald, global chief economist and head of macro strategy at Manulife Investment Management, said by phone. The risk is that Canada could face a “2013-type taper tantrum,” Donald said, referring to a panic-induced spike in yields that occurred after the Federal Reserve suggested it would begin scaling back its bond purchases.
Macklem may provide more clarity on his statement in September that bond purchases will be “calibrated” to provide the needed stimulus. One possibility is that policy makers could alter the focus of their bond buying to different parts of the curve, according to Royce Mendes, an economist at Canadian Imperial Bank of Commerce.
“There could be some scope for calibration there, but it would be technical rather than fundamental in nature,” Mendes said by phone.
Economists expect the Bank of Canada to upwardly revise 2020 growth projections, which turned out to be overly pessimistic. But they don’t anticipate a rosy outlook.
“Any enthusiasm is likely to be dampened by the second wave of COVID-19 infections that is now underway and new containment measures that will put additional pressure on what was already a slowing pace of recovery,” Josh Nye, an economist at RBC Capital Markets, said by email.
While other central banks including the Bank of England and the Reserve Bank of Australia look set to provide some additional stimulus, there may be less pressure on the Bank of Canada to do more, Nye said, citing fiscal policy that “remains quite supportive.”
“It’s also worth noting that the BoC has already been one of the more aggressive central banks in expanding its balance sheet since the start of the pandemic,” Nye said.