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The Bank of Canada kept its key interest rate on hold. It also said the economy continues to face uncertainties because of the COVID-19 pandemic. Anthony Okolie speaks with Scott Colbourne, Managing Director, Active Fixed Income, TD Asset Management, about the outlook for the economy.
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- Scott, the Bank of Canada did as expected, keeping its key rate unchanged. But they also described the country's economic outlook as extremely uncertain. What's your take?
- Yeah, Anthony. It's, you know, no surprises from the Bank of Canada announcement today. Definitely the Bank of Canada highlights that we continue to be in a very uncertain environment and the recovery is going to be long. They see a bit of a recovery maybe out in 2022. So the markets haven't taken a lot out of this, but the bank is there and is committed to keeping rates low for a long period of time here.
- The Bank of Canada also plans to continue their Government of Canada Bonds Purchase Program of at least $5 billion a week in the wake of the soaring federal deficits. Any surprises there for you?
- No. I mean, they gave themselves flexibility. Obviously, they committed to buying $5 billion a week of government securities, and they've given themselves flexibility to increase purchases if necessary, perhaps if the economic outlook deteriorates in the second half of the year. So I think it's reassuring for the credit and the rates market that the Bank of Canada is there and is recommitted to that program.
- And certainly there's a lot of uncertainty among Canadians. Where do you see the economy headed in the second half of this year?
- Yeah, you know, it's challenging. Obviously, there's lots of uncertainty, and we don't know what might happen with the virus in the second half of the year. Obviously, a big shock in the second quarter in the Bank of Canada results and forecasters out there definitely see a bounce back in Q3. And that's obviously very, very positive to supplies of the economies coming back online.
The demand side is the uncertainty as we go back into the fall, and we continue to obviously see and the Bank of Canada see some recovery. But it's a slow, gradual, uncertain pace. And like most central banks out there, whether it's the Fed, the BOJ, or the ECB, they definitely committed to supporting the markets through this uncertain and trying to navigate the challenges that we see over the course of the next couple of years.
- So given all this uncertainty in the markets, what are some the risks to the bank's outlook right now?
- Well, I mean, you can look at both sides, the glass half full or empty, right? Obviously, the risk here is that you get a bit of a shock. You know, on the virus, we get a big second wave, things deteriorate, and we have to lock down in the second half as we go back indoors more and more. So that's the risk, that things grind lower.
But, I mean, you could also see a positive side from a vaccine or therapy that really helps move the recovery forward. And that demand side of the economy, the consumer demand side, recovers, perhaps, quicker than most of us see. So that's the uncertainty in a nutshell, right? I mean, you're navigating through these difficult times, and you can go either way.
- And we just have a few seconds left, but I have to ask you, where do you see the loonie going over the next little while?
- Yeah. I think the twin shocks, whether it's COVID or oil shock in Canada, and we've got a very over levered private sector, means that the recovery in the Canadian dollar is going to lag the broad recovery in other currencies. That being said, the US dollar is weakening and will continue to be on a weakening trend.
So that's a positive for the Canadian dollar. So I see the possibility of it improving here, maybe down to 133 ish. A bit of a range. 133 to 148, 140 is sort of where I play it. But underperforming other global currencies is my expectation.
- Scott, thank you very much for your insights.
- My pleasure. Thanks, Anthony.
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- Yeah, Anthony. It's, you know, no surprises from the Bank of Canada announcement today. Definitely the Bank of Canada highlights that we continue to be in a very uncertain environment and the recovery is going to be long. They see a bit of a recovery maybe out in 2022. So the markets haven't taken a lot out of this, but the bank is there and is committed to keeping rates low for a long period of time here.
- The Bank of Canada also plans to continue their Government of Canada Bonds Purchase Program of at least $5 billion a week in the wake of the soaring federal deficits. Any surprises there for you?
- No. I mean, they gave themselves flexibility. Obviously, they committed to buying $5 billion a week of government securities, and they've given themselves flexibility to increase purchases if necessary, perhaps if the economic outlook deteriorates in the second half of the year. So I think it's reassuring for the credit and the rates market that the Bank of Canada is there and is recommitted to that program.
- And certainly there's a lot of uncertainty among Canadians. Where do you see the economy headed in the second half of this year?
- Yeah, you know, it's challenging. Obviously, there's lots of uncertainty, and we don't know what might happen with the virus in the second half of the year. Obviously, a big shock in the second quarter in the Bank of Canada results and forecasters out there definitely see a bounce back in Q3. And that's obviously very, very positive to supplies of the economies coming back online.
The demand side is the uncertainty as we go back into the fall, and we continue to obviously see and the Bank of Canada see some recovery. But it's a slow, gradual, uncertain pace. And like most central banks out there, whether it's the Fed, the BOJ, or the ECB, they definitely committed to supporting the markets through this uncertain and trying to navigate the challenges that we see over the course of the next couple of years.
- So given all this uncertainty in the markets, what are some the risks to the bank's outlook right now?
- Well, I mean, you can look at both sides, the glass half full or empty, right? Obviously, the risk here is that you get a bit of a shock. You know, on the virus, we get a big second wave, things deteriorate, and we have to lock down in the second half as we go back indoors more and more. So that's the risk, that things grind lower.
But, I mean, you could also see a positive side from a vaccine or therapy that really helps move the recovery forward. And that demand side of the economy, the consumer demand side, recovers, perhaps, quicker than most of us see. So that's the uncertainty in a nutshell, right? I mean, you're navigating through these difficult times, and you can go either way.
- And we just have a few seconds left, but I have to ask you, where do you see the loonie going over the next little while?
- Yeah. I think the twin shocks, whether it's COVID or oil shock in Canada, and we've got a very over levered private sector, means that the recovery in the Canadian dollar is going to lag the broad recovery in other currencies. That being said, the US dollar is weakening and will continue to be on a weakening trend.
So that's a positive for the Canadian dollar. So I see the possibility of it improving here, maybe down to 133 ish. A bit of a range. 133 to 148, 140 is sort of where I play it. But underperforming other global currencies is my expectation.
- Scott, thank you very much for your insights.
- My pleasure. Thanks, Anthony.
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