The Bank of Canada keeps its key policy rate unchanged, even though the economy lost a bit of steam in the second quarter. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about what risk the Delta variant poses to Canada’s recovery in the second half of the year.
- The Bank of Canada kept its key overnight rate steady at 25 basis points as expected. James, what stood out for you today?
- Yeah, thanks Anthony. It's definitely a situation where the Bank of Canada has announced two things, really. They have, one, acknowledged that the economic growth landscape has changed significantly. The GDP disappointment for Q2 was front and center in this report. They highlighted the fact that supply chain bottlenecks had slowed export growth and the little bit of slowdown in housing activity has impacted residential investment.
But on the other side, the second main factor is the fact that they think this is going to be probably the low point in the year. So, they're expecting a bounce back growth, they're expecting that the rest of 2021 is going to be looking much better than the recent quarter. And so I think that's sort of the story that they're trying to tell, is that we've had a little bit of weakness but we're looking to get a nice rebound after this time period.
- OK. So given this evidence of slowing economic growth in Canada, is it becoming less likely that we'll see a rate hike in 2022?
- Yeah. So, I guess our view is that, given the fact that we're expecting a rebound right now, we're seeing that in some of the data already, some of the flash estimates of GDP, some of the employment gains, the fact that the unemployment rate's going down, that bodes well for consumer spending going forwards.
In our opinion, we're looking at the Bank of Canada still on pace to taper its quantitative easing program in October and we think that even though we've had a little bit of a slowdown-- it's been bumpy for sure-- we do think the Bank of Canada is still on pace for a rate hike in late 2022. It's just more of a situation that, given with everything with this pandemic, there's a lot of starts, and stops, and bumps along the road, and I think we're just getting used to that dynamic.
- And, of course, the Bank of Canada continues to maintain that inflation is transitory. What are your thoughts?
- So, definitely, a lot of the inflation is transitory. We know that things like gas prices have gone up significantly from low basis. We know that supply chain bottlenecks are making pretty much everything in the production process very expensive. Most economists will say that it looks like these sort of things should work themselves out.
But what I think the Bank Canada is acknowledging, and what we've been saying for quite a while, is that a lot of these supply chain issues can last a lot longer than people think. It's not one of those things where you just switch on the light and more production comes out. It does take a long time. So we think that high inflation, specifically, is going to persist for a little bit longer and it seems like the Bank of Canada is acknowledging that as well.
- And what are the risks to the bank's outlook in the near term?
- Well, I think the biggest risk-- like, there's obviously some that have already impacted economic growth so far. We mentioned the supply chain bottlenecks that limit our production. We see that in car production in lower exports. We saw the fact that there was a little bit of reduction in housing demand over the last few months. That, combined with the Delta variant, that seems to be resulting in rising infection rates around Canada, is definitely going to limit the consumption spending.
So, for example, even if the government doesn't impose restrictions on us, we're going to be in a situation where people might be a little bit more hesitant to go out and do things and be as social as we typically are. So we kind of self-govern ourselves in that way, and this is problematic because everything we've been talking about right now with this rebound is that we went from a huge amount of spending on goods, because we're inside all the time-- we fill our homes with products, we buy gym equipment-- to moving to services.
And that service spending that we're expecting, that we really need to rebound, might be limited and might be slowed due to a rising COVID infection. So, the hope is that this is more of a temporary thing, something that we're able to get through. But the risk is that this is something that builds into something much worse and it definitely slows our spending and our behavior patterns and definitely slows consumption growth and GDP overall.
- And where do you see the loonie going in the next little while?
- Yeah, so the loonie's been quite weak over the last little bit. I think a lot of it has to do with the fact that Canadian economic growth has been disappointing to the downside. We're totally in a situation where, in Canada versus the US, the US is looking like it's going to have very resilient growth in the next few months. Canada, we're a little bit uncertain given the recent handoff of weak growth.
Given everything, given the commodity story, what you really need for a higher Canadian dollar is, one, Canadian economic outperformance, which it's going to be hard to get that over the next little while. And two, you're going to have to get commodity prices soaring, and given everything with the Delta variant, we're seeing China growth slowing. China is a huge, huge buyer of commodities, which definitely supports the Canadian economy and supports the Canadian dollar. So in our view, we're fairly priced right now-- we're about $0.79-- and I'm not expecting there to be much of an impetus for a rising Canadian dollar from here.
- James, thank you very much for your time.
- Thank you.