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The Bank of Canada reaffirmed its pledge to keep interest rates at historical lows, potentially for years to come. Anthony Okolie speaks with Scott Colbourne, Managing Director, TD Asset Management, about the implications of keeping rates lower for longer.
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- The Bank of Canada kept rates unchanged, as expected, but they also seem to be indicating that rates will be lower for longer. Scott, what's your take?
- Well, the Bank of Canada's announcement today was not really much of a surprise. They kept the rates on hold, and they announced that the quantitative-easing program continues as is. So there was really no new surprise.
But to your point about rates, we do expect them to stay low for a couple more years as the economy recovers here and the Bank of Canada recalibrates as appropriate.
- I want to talk a little bit about inflation, which is currently near zero. Do you see the Bank of Canada following the Fed and raising its inflation target above 2%?
- That's a good question. The Fed announced the average inflation targeting, and so there's lots of speculation as to what that will mean for other central banks. The Bank of Canada is undergoing its own review with the government, the Department of Finance, and it'll be announced at the end of 2021.
Bear in mind that the bank has flexibility between 1% and 3%, so it has the ability to move. In the short term, there will be no announcements as per what happened in the US with the Fed, but look forward to announcements next year. And certainly what happened in the US and with the Fed and average inflation targeting will inform how the bank thinks about inflation going forward.
- The Bank of Canada also plans to continue its Government Canada bond-purchase program of at least $5 billion per week until the recovery is well under way. Any surprises there?
- No surprise today. I mean, they did tweak the language in the announcement, very minor. They did say that they're going to recalibrate quantitative easing, as it's appropriate for the recovery. We've had an amazing bounce back in the second quarter as we've reopened the economy. Now we're going to the recuperation phase, and it's really lots of uncertainties associated with that. So the bank's going to fine tune as appropriate.
- I want to talk about some of those uncertainties. What are some of the risks to the bank's outlook right now?
- The bank has made it very clear that we're going into the recuperation phase. That means in many places reopening of schools. You've got the fall and moving into the winter.
So there's uncertainties. And that high degree of uncertainty makes it difficult to really forecast with a lot of precision. They've underestimated the bounce back. So we're going to just take it slowly and really keep monetary policy setting very accommodative for a number of years going forward.
- And finally, where do you see the loonie going over the next little while?
- The whole story this summer has been a US-dollar story. The US dollar has weakened off, and you've seen it weaken across a variety of currencies, including the Canadian dollar. Got down to around $1.30 against the US dollar. And so we've had a little bounce off that level.
So I think the Canadian dollar is going to be a function of how the US dollar performs. And so we've gone from a big recovery phase here, a reflation phase, and we've seen a little bit of pause, whether it's in the equity markets, foreign-exchange market. And the likelihood is that we'll continue to be slightly stronger on the Canadian dollar, but in the short term, we're definitely recalibrating and pausing that as we go into the fall.
- Scott, thank you very much for your analysis.
- My pleasure. Thanks.
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- Well, the Bank of Canada's announcement today was not really much of a surprise. They kept the rates on hold, and they announced that the quantitative-easing program continues as is. So there was really no new surprise.
But to your point about rates, we do expect them to stay low for a couple more years as the economy recovers here and the Bank of Canada recalibrates as appropriate.
- I want to talk a little bit about inflation, which is currently near zero. Do you see the Bank of Canada following the Fed and raising its inflation target above 2%?
- That's a good question. The Fed announced the average inflation targeting, and so there's lots of speculation as to what that will mean for other central banks. The Bank of Canada is undergoing its own review with the government, the Department of Finance, and it'll be announced at the end of 2021.
Bear in mind that the bank has flexibility between 1% and 3%, so it has the ability to move. In the short term, there will be no announcements as per what happened in the US with the Fed, but look forward to announcements next year. And certainly what happened in the US and with the Fed and average inflation targeting will inform how the bank thinks about inflation going forward.
- The Bank of Canada also plans to continue its Government Canada bond-purchase program of at least $5 billion per week until the recovery is well under way. Any surprises there?
- No surprise today. I mean, they did tweak the language in the announcement, very minor. They did say that they're going to recalibrate quantitative easing, as it's appropriate for the recovery. We've had an amazing bounce back in the second quarter as we've reopened the economy. Now we're going to the recuperation phase, and it's really lots of uncertainties associated with that. So the bank's going to fine tune as appropriate.
- I want to talk about some of those uncertainties. What are some of the risks to the bank's outlook right now?
- The bank has made it very clear that we're going into the recuperation phase. That means in many places reopening of schools. You've got the fall and moving into the winter.
So there's uncertainties. And that high degree of uncertainty makes it difficult to really forecast with a lot of precision. They've underestimated the bounce back. So we're going to just take it slowly and really keep monetary policy setting very accommodative for a number of years going forward.
- And finally, where do you see the loonie going over the next little while?
- The whole story this summer has been a US-dollar story. The US dollar has weakened off, and you've seen it weaken across a variety of currencies, including the Canadian dollar. Got down to around $1.30 against the US dollar. And so we've had a little bounce off that level.
So I think the Canadian dollar is going to be a function of how the US dollar performs. And so we've gone from a big recovery phase here, a reflation phase, and we've seen a little bit of pause, whether it's in the equity markets, foreign-exchange market. And the likelihood is that we'll continue to be slightly stronger on the Canadian dollar, but in the short term, we're definitely recalibrating and pausing that as we go into the fall.
- Scott, thank you very much for your analysis.
- My pleasure. Thanks.
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