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The Bank of Canada kept its key policy rate unchanged, but signaled potential interest rate hikes in 2022. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the outlook for Canada’s economic recovery.
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[CHORD]
- The Bank of Canada kept its overnight rates steady at 25 basis points. But now they see rates on hold into 2022 instead of 2023. James, did anything stand out for you today?
- Yeah, thanks, Anthony. The big news today, the important thing is the Bank of Canada has upgraded growth outlook. In spite of the third wave of COVID-19 infections, in spite of the more stringent mobility requirements, the lockdowns, all that stuff that are headwinds to economic growth, Canadians and Canadian businesses have done extremely well. We've been able to create jobs, keep economic growth momentum going. And the Bank of Canada is recognizing that. And they should. They should recognize that we're doing really well.
The economy has been incredibly resilient. And to your point, the economy is likely going to be able to be fully recovered much earlier than previously thought. So that's a testament to Canadians and Canadian businesses.
- We also saw today that the Bank of Canada intends to taper their weekly bond purchases. What does that move suggest to you?
- Yeah, so I think it's consistent with the growth outlook story that we're talking about. The idea that we have quantitative easing, where the Bank of Canada is outrightly purchasing government of Canada debt to be able to push yields down, they do that to be able to support the economy, cause or result in a much faster acceleration and the recovery. The fact that they're purchasing less signals that they don't need to do as much, that the economy can stand on its own two feet a little bit more.
And we expect this tapering to actually continue over the next few months, that they're eventually going to get to a state where the economy is doing really well. And they're not going to need quantitative easing the way they're doing it right now. So this is just more of another sign that we're doing really well, that the economy is able to really, like I said before, stand on its own two feet and make sure that economic growth momentum stays in place.
- And I also wanted to talk about the federal budget, of course, which was just released a few days ago. Do you see any immediate impacts on Bank of Canada's policy in the short term?
- Yeah, so the Bank of Canada is probably seeing the government's going to continue spending a lot of money. And that will be something that is going to help out economic growth. So economic growth is going to be higher as a result of the budget.
For most Canadians, we know and we've experienced over the last 12 months that the Bank of Canada providing that safety net for people that either lost their jobs or weren't able to work as many hours is incredibly important to be able to support people's incomes. And that is the reason why-- that's one of the main reasons why we've been able to have this acceleration in economic growth, why we're doing so well right now. So on the broad scheme of things, the federal government supports are needed. And I, personally, am happy that they're stepping up and maintaining a consistent messaging, and providing that support that Canadians and Canadian businesses need.
- And what are the risks to the bank's outlook in the near term? And where does housing fit into that equation?
- Sure. So there's always risks to any economic forecast. We look right now, and we're seeing a situation where emergency orders are in place due to COVID. And we're looking at stringency measures.
I mean, these are headwinds. These are absolute headwinds that are going to slow economic growth more than they would have. And the path of the virus is incredibly hard to predict. But when you look past all of this, and you look to think that, you know what, as people are getting more and more vaccinated, as we open up more and more, especially coming into the summer months, as we're expecting, the economic growth rebound should be quite substantial.
And on the housing side of things, housing hasn't skipped a beat during this-- during the pandemic. In fact, everyone knows that house prices and activity are at all-time highs. This is due to the fact that people have reassessed housing to them.
They want more space. Mortgage rates are really low. People that have-- that were kind of in the market to buy a house, they hadn't seen their incomes shocked at all, really. And so all of this has come together to support housing markets.
And I realize there's macroprudential policies being proposed right now. But our view is that this is not going to slow down the housing market. The Bank of Canada is probably seeing this, and they don't want financial instability in the housing market. They definitely do fear that rising house prices cause financial vulnerabilities.
So I think they're definitely going to watch housing. But in the same time, they've already upgraded their housing outlook in this monetary policy report. So I don't see housing slowing down. But it is something that the Bank of Canada is probably watching. And it might be something that causes them to bring forward the reduction in their monetary policy support, whether it be less quantitative easing or even earlier-than-expected rate hikes.
- And, James, finally, after the decision, the rate decision, we did see the Canadian dollar strengthening a little bit. Where do you see the loonie going over the next little while?
- Yeah, so we've been calling for a rising loonie for some time right now. This was on the back of two things. One is that the economic recovery is going to keep doing well. That's going to result in higher or quicker-than-expected rate hikes and higher bond yields in Canada.
The other factor is that this global recovery that we've seen has pushed up commodity prices. Anyone that's filled up their car with gasoline recently knows that commodity prices are rising. And that is-- well, it's expensive for us to fill up our cars. But it's also good for Canadian exports.
And so when you think about the Canadian dollar, you've got to think about that export story and that export channel. And it's not just gasoline. It's not just energy. It's everything. It's copper. It's lumber. Prices for commodities are high. And Canada exports these products. And as a result, that causes demand for the Canadian dollar. And we expect this recent rise in the loonie to continue a little bit more over the next few months.
- James, thank you very much for your time.
- No problem. Thank you.
[MUSIC PLAYING]
- The Bank of Canada kept its overnight rates steady at 25 basis points. But now they see rates on hold into 2022 instead of 2023. James, did anything stand out for you today?
- Yeah, thanks, Anthony. The big news today, the important thing is the Bank of Canada has upgraded growth outlook. In spite of the third wave of COVID-19 infections, in spite of the more stringent mobility requirements, the lockdowns, all that stuff that are headwinds to economic growth, Canadians and Canadian businesses have done extremely well. We've been able to create jobs, keep economic growth momentum going. And the Bank of Canada is recognizing that. And they should. They should recognize that we're doing really well.
The economy has been incredibly resilient. And to your point, the economy is likely going to be able to be fully recovered much earlier than previously thought. So that's a testament to Canadians and Canadian businesses.
- We also saw today that the Bank of Canada intends to taper their weekly bond purchases. What does that move suggest to you?
- Yeah, so I think it's consistent with the growth outlook story that we're talking about. The idea that we have quantitative easing, where the Bank of Canada is outrightly purchasing government of Canada debt to be able to push yields down, they do that to be able to support the economy, cause or result in a much faster acceleration and the recovery. The fact that they're purchasing less signals that they don't need to do as much, that the economy can stand on its own two feet a little bit more.
And we expect this tapering to actually continue over the next few months, that they're eventually going to get to a state where the economy is doing really well. And they're not going to need quantitative easing the way they're doing it right now. So this is just more of another sign that we're doing really well, that the economy is able to really, like I said before, stand on its own two feet and make sure that economic growth momentum stays in place.
- And I also wanted to talk about the federal budget, of course, which was just released a few days ago. Do you see any immediate impacts on Bank of Canada's policy in the short term?
- Yeah, so the Bank of Canada is probably seeing the government's going to continue spending a lot of money. And that will be something that is going to help out economic growth. So economic growth is going to be higher as a result of the budget.
For most Canadians, we know and we've experienced over the last 12 months that the Bank of Canada providing that safety net for people that either lost their jobs or weren't able to work as many hours is incredibly important to be able to support people's incomes. And that is the reason why-- that's one of the main reasons why we've been able to have this acceleration in economic growth, why we're doing so well right now. So on the broad scheme of things, the federal government supports are needed. And I, personally, am happy that they're stepping up and maintaining a consistent messaging, and providing that support that Canadians and Canadian businesses need.
- And what are the risks to the bank's outlook in the near term? And where does housing fit into that equation?
- Sure. So there's always risks to any economic forecast. We look right now, and we're seeing a situation where emergency orders are in place due to COVID. And we're looking at stringency measures.
I mean, these are headwinds. These are absolute headwinds that are going to slow economic growth more than they would have. And the path of the virus is incredibly hard to predict. But when you look past all of this, and you look to think that, you know what, as people are getting more and more vaccinated, as we open up more and more, especially coming into the summer months, as we're expecting, the economic growth rebound should be quite substantial.
And on the housing side of things, housing hasn't skipped a beat during this-- during the pandemic. In fact, everyone knows that house prices and activity are at all-time highs. This is due to the fact that people have reassessed housing to them.
They want more space. Mortgage rates are really low. People that have-- that were kind of in the market to buy a house, they hadn't seen their incomes shocked at all, really. And so all of this has come together to support housing markets.
And I realize there's macroprudential policies being proposed right now. But our view is that this is not going to slow down the housing market. The Bank of Canada is probably seeing this, and they don't want financial instability in the housing market. They definitely do fear that rising house prices cause financial vulnerabilities.
So I think they're definitely going to watch housing. But in the same time, they've already upgraded their housing outlook in this monetary policy report. So I don't see housing slowing down. But it is something that the Bank of Canada is probably watching. And it might be something that causes them to bring forward the reduction in their monetary policy support, whether it be less quantitative easing or even earlier-than-expected rate hikes.
- And, James, finally, after the decision, the rate decision, we did see the Canadian dollar strengthening a little bit. Where do you see the loonie going over the next little while?
- Yeah, so we've been calling for a rising loonie for some time right now. This was on the back of two things. One is that the economic recovery is going to keep doing well. That's going to result in higher or quicker-than-expected rate hikes and higher bond yields in Canada.
The other factor is that this global recovery that we've seen has pushed up commodity prices. Anyone that's filled up their car with gasoline recently knows that commodity prices are rising. And that is-- well, it's expensive for us to fill up our cars. But it's also good for Canadian exports.
And so when you think about the Canadian dollar, you've got to think about that export story and that export channel. And it's not just gasoline. It's not just energy. It's everything. It's copper. It's lumber. Prices for commodities are high. And Canada exports these products. And as a result, that causes demand for the Canadian dollar. And we expect this recent rise in the loonie to continue a little bit more over the next few months.
- James, thank you very much for your time.
- No problem. Thank you.
[MUSIC PLAYING]
