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The Bank of Canada kept its key policy rate unchanged, saying the economy will carry excess supply over the next two years keeping inflation below the target through 2022. Anthony Okolie speaks with James Marple, Senior Economist, TD Bank, about the outlook for Canadian economic growth.
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- The Bank of Canada kept rates unchanged as expected. But they did signal that they are likely to keep rates on hold into 2023. James, what's your take?
- Well nothing too surprising in this announcement. I mean, we've seen the hit to the economy now. We have some actual data on it. And they noted that the initial pace of the decline was perhaps not as bad as they thought, but there are signs that growth is slowing going forward. And obviously now we're seeing an increase in COVID cases and some lockdowns-- or at least stepping back in terms of opening. And that will slow growth further. So yeah, I mean, in that environment we would expect them to continue to signal ongoing support for as long as necessary.
- And I want to talk about the growth outlook because the Bank of Canada now sees Canada's economy contracting less than previously expected in 2020, but they do see more weakness in 2021. Any surprises there for you?
- Well, I think they were very transparent in their monetary policy report to say, look, it's a very difficult environment to do any kind of economic forecast. And you just have to state that it is hugely dependent on health outcomes, which are, frankly, not predictable. So they note that if we-- I mean, we do know a few things. We know that we're probably not going to see the kind of lockdowns and stay at home orders that happened initially. Although we will see an ebb and flowing of restrictions on activity and on people just voluntarily reducing activity in order to feel safe and stay safe. And we also know something of the policy supports we've had.
But the big question is, how long does this virus last and when do we get an effective treatment? And they stated that they don't see that happening until mid-2022. I mean, it's a guess. It's an assumption, just like any other. But in that environment it will be very difficult for the economy to fully recover.
And in fact, they do have the economy getting back to its pre-recession level, I believe in the second half of 2021, so next year. And that will happen with continued disruption. I mean, we'll have to see resources allocated away from high-touch areas to other sectors. And that is going to be painful. And again, in that environment, I think we're going to continue to see monetary policy be as supportive as it possibly can be.
- And in the pulse report-- or in the statement, rather-- the Bank of Canada is also scaling back gradually their Government of Canada Bond Buying Program. What are the implications there?
- Yeah, well they noted that they would decrease the amount of purchases, but they would change its composition to more longer term purchases. And I think it's fair to say-- and they state this in the statement-- that that maintains the same type of level of monetary accommodation, that purchasing further out the yield curve.
I mean, one, it's a little more commitment by the central bank because those are harder to sell off-- or more risk there in terms of potential price movements than at the short end of the curve, which they really can't anchor with the policy rate. But also that those are the rates that matter for the economy in terms of borrowing costs to businesses and households. So changing the composition likely is enough to offset any decrease in the overall amount of purchases.
And I want to touch on risks. And I know you mentioned COVID-19, obviously. But are there any other risks to the banks outlook right now?
- Well certainly. And they note this. I mean, financial conditions, which so far had been very accommodative, but if we were to see those tighten on a global scale, potentially due to worries about the virus and any setbacks in terms of treatment, but also policy measures-- I mean, we see some volatility increase. And that's always a bit of a risk. You know, there are all sorts of geopolitical risks.
But as well, I mean, that policy has so far built a bridge for households and for businesses that has resulted in-- we haven't seen a big deterioration in credit quality or rising insolvencies on either the household or the business side. But the longer this goes on, the more difficult it will be to maintain businesses and avoid some of those increase in defaults and insolvencies. And that naturally could cause financial conditions to tighten, and that's obviously a key risk. And why, again, they're going to err on the side of really trying to push hard on the monetary accelerator and try to keep those financial conditions as accommodative as possible.
- And finally, we have just a few seconds left. But where do you see the Loonie going in the next little while?
- Well we think the Canadian dollar could appreciate just a little bit against the US dollar. In part we have a fairly constructive commodity price outlook. We don't expect any major increases. But as long as the global economy continues on the road to recovery, we should see a little bit higher Canadian dollar, just on the back of that global recovery story. But I wouldn't expect it to get much above the high 70s range.
- James, thank you very much for your time.
- You're welcome.
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- Well nothing too surprising in this announcement. I mean, we've seen the hit to the economy now. We have some actual data on it. And they noted that the initial pace of the decline was perhaps not as bad as they thought, but there are signs that growth is slowing going forward. And obviously now we're seeing an increase in COVID cases and some lockdowns-- or at least stepping back in terms of opening. And that will slow growth further. So yeah, I mean, in that environment we would expect them to continue to signal ongoing support for as long as necessary.
- And I want to talk about the growth outlook because the Bank of Canada now sees Canada's economy contracting less than previously expected in 2020, but they do see more weakness in 2021. Any surprises there for you?
- Well, I think they were very transparent in their monetary policy report to say, look, it's a very difficult environment to do any kind of economic forecast. And you just have to state that it is hugely dependent on health outcomes, which are, frankly, not predictable. So they note that if we-- I mean, we do know a few things. We know that we're probably not going to see the kind of lockdowns and stay at home orders that happened initially. Although we will see an ebb and flowing of restrictions on activity and on people just voluntarily reducing activity in order to feel safe and stay safe. And we also know something of the policy supports we've had.
But the big question is, how long does this virus last and when do we get an effective treatment? And they stated that they don't see that happening until mid-2022. I mean, it's a guess. It's an assumption, just like any other. But in that environment it will be very difficult for the economy to fully recover.
And in fact, they do have the economy getting back to its pre-recession level, I believe in the second half of 2021, so next year. And that will happen with continued disruption. I mean, we'll have to see resources allocated away from high-touch areas to other sectors. And that is going to be painful. And again, in that environment, I think we're going to continue to see monetary policy be as supportive as it possibly can be.
- And in the pulse report-- or in the statement, rather-- the Bank of Canada is also scaling back gradually their Government of Canada Bond Buying Program. What are the implications there?
- Yeah, well they noted that they would decrease the amount of purchases, but they would change its composition to more longer term purchases. And I think it's fair to say-- and they state this in the statement-- that that maintains the same type of level of monetary accommodation, that purchasing further out the yield curve.
I mean, one, it's a little more commitment by the central bank because those are harder to sell off-- or more risk there in terms of potential price movements than at the short end of the curve, which they really can't anchor with the policy rate. But also that those are the rates that matter for the economy in terms of borrowing costs to businesses and households. So changing the composition likely is enough to offset any decrease in the overall amount of purchases.
And I want to touch on risks. And I know you mentioned COVID-19, obviously. But are there any other risks to the banks outlook right now?
- Well certainly. And they note this. I mean, financial conditions, which so far had been very accommodative, but if we were to see those tighten on a global scale, potentially due to worries about the virus and any setbacks in terms of treatment, but also policy measures-- I mean, we see some volatility increase. And that's always a bit of a risk. You know, there are all sorts of geopolitical risks.
But as well, I mean, that policy has so far built a bridge for households and for businesses that has resulted in-- we haven't seen a big deterioration in credit quality or rising insolvencies on either the household or the business side. But the longer this goes on, the more difficult it will be to maintain businesses and avoid some of those increase in defaults and insolvencies. And that naturally could cause financial conditions to tighten, and that's obviously a key risk. And why, again, they're going to err on the side of really trying to push hard on the monetary accelerator and try to keep those financial conditions as accommodative as possible.
- And finally, we have just a few seconds left. But where do you see the Loonie going in the next little while?
- Well we think the Canadian dollar could appreciate just a little bit against the US dollar. In part we have a fairly constructive commodity price outlook. We don't expect any major increases. But as long as the global economy continues on the road to recovery, we should see a little bit higher Canadian dollar, just on the back of that global recovery story. But I wouldn't expect it to get much above the high 70s range.
- James, thank you very much for your time.
- You're welcome.
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