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The Bank of Canada keeps its key policy rate unchanged, and pledges not to raise interest rates until the economy recovers from the COVID-19 pandemic. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the outlook for Canada’s economic recovery.
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[THEME MUSIC]
- The Bank of Canada kept its key overnight rate unchanged at 25 basis points, but there are no new forecasts today. James, what's the bank's key message?
- Thanks, Anthony. The situation right now is the Bank of Canada is really just reinforcing their confidence that the economy is going to be on a solid track going forwards. Obviously, the setbacks that we had from the lockdown across Canada, it has been a negative shock. But with reopening, the expectation is that we're going to have a really strong rebound going to the summer.
And so what that means is that there's a lot of pent-up demand that we're expecting to come off the sidelines. We're expecting consumer spending, obviously, to ramp up. That's going to incentivize businesses to hire more. And all this, what it's going to do is put the economy back on the path it was before these social restrictions came into place.
- OK, so given that there wasn't any change in policy from the Bank of Canada today, does this sort of shift the attention to the next meeting in July?
- It definitely does. We know, obviously-- we're talking in Ontario right now and the restrictions are starting to ease-- we're going to have, in July, more information about just how strong this rebound's going to be. So I think the Bank of Canada will be looking for more evidence that their forecast of how we're going to recover over the next few weeks-- they're going to have more evidence to prove that that is true and that we're on that stronger footing that we're talking about.
- And I want to talk about housing, because it continues to be a key focus for many Canadians. Does housing still pose a risk to the bank's outlook in the near term?
- Yeah, I think housing is really the biggest risk for the Bank of Canada. We've seen massive house price increases. We've seen a big accumulation in debt that Canadians are willing to take on. So much of our spending is going to either buying a house-- or not even just buying, but maintaining a house. Things like gas, electricity prices are going up. So we're spending so much more money on this. We have high levels of debt.
The fear is that the Bank of Canada's already communicated that it's probably going to raise interest rates in the next two years, so start that rate hiking cycle. That feeds into government yields, which feeds into higher mortgage rates. And so the idea right now is that, how are Canadians going to be able to handle that when interest rates do rise? And so definitely a risk, probably the biggest risk the Bank of Canada faces right now.
- Talk to us a little bit about the Canadian dollar, because it's been very strong recently, thanks to commodity prices and a sort of aggressive monetary policy from the Bank of Canada. Where do you see the loonie going over in the next little while?
- Yeah, so you mentioned the two reasons why the loonie has gone up and has been really the best-performing large currency in the world against the US dollar. The fact that the Bank of Canada is likely going to raise rates, our forecast says, by the end of 2022, potentially even moving ahead of the Federal Reserve with respect to its rate hike cycle. And the other thing is the commodity prices you mentioned. They're just doing so well. It's not just oil, but everything, really-- copper, lumber-- everything that if you dropped it on your foot, it hurts, is going up in prices. And so we're in a situation where the loonie is reflecting a lot of that right now.
It's going to take a lot more effort. The bar is higher for the loonie to continue to rise. The last time we were at $0.90 or even parity, the oil prices were in the hundreds of dollars. We're not forecasting that. So it could happen, but we think the Canadian dollar is pretty much at fair value right now. But look out for those commodity prices. If they keep surging, then the Canadian dollar will follow it upwards.
- James, thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
- The Bank of Canada kept its key overnight rate unchanged at 25 basis points, but there are no new forecasts today. James, what's the bank's key message?
- Thanks, Anthony. The situation right now is the Bank of Canada is really just reinforcing their confidence that the economy is going to be on a solid track going forwards. Obviously, the setbacks that we had from the lockdown across Canada, it has been a negative shock. But with reopening, the expectation is that we're going to have a really strong rebound going to the summer.
And so what that means is that there's a lot of pent-up demand that we're expecting to come off the sidelines. We're expecting consumer spending, obviously, to ramp up. That's going to incentivize businesses to hire more. And all this, what it's going to do is put the economy back on the path it was before these social restrictions came into place.
- OK, so given that there wasn't any change in policy from the Bank of Canada today, does this sort of shift the attention to the next meeting in July?
- It definitely does. We know, obviously-- we're talking in Ontario right now and the restrictions are starting to ease-- we're going to have, in July, more information about just how strong this rebound's going to be. So I think the Bank of Canada will be looking for more evidence that their forecast of how we're going to recover over the next few weeks-- they're going to have more evidence to prove that that is true and that we're on that stronger footing that we're talking about.
- And I want to talk about housing, because it continues to be a key focus for many Canadians. Does housing still pose a risk to the bank's outlook in the near term?
- Yeah, I think housing is really the biggest risk for the Bank of Canada. We've seen massive house price increases. We've seen a big accumulation in debt that Canadians are willing to take on. So much of our spending is going to either buying a house-- or not even just buying, but maintaining a house. Things like gas, electricity prices are going up. So we're spending so much more money on this. We have high levels of debt.
The fear is that the Bank of Canada's already communicated that it's probably going to raise interest rates in the next two years, so start that rate hiking cycle. That feeds into government yields, which feeds into higher mortgage rates. And so the idea right now is that, how are Canadians going to be able to handle that when interest rates do rise? And so definitely a risk, probably the biggest risk the Bank of Canada faces right now.
- Talk to us a little bit about the Canadian dollar, because it's been very strong recently, thanks to commodity prices and a sort of aggressive monetary policy from the Bank of Canada. Where do you see the loonie going over in the next little while?
- Yeah, so you mentioned the two reasons why the loonie has gone up and has been really the best-performing large currency in the world against the US dollar. The fact that the Bank of Canada is likely going to raise rates, our forecast says, by the end of 2022, potentially even moving ahead of the Federal Reserve with respect to its rate hike cycle. And the other thing is the commodity prices you mentioned. They're just doing so well. It's not just oil, but everything, really-- copper, lumber-- everything that if you dropped it on your foot, it hurts, is going up in prices. And so we're in a situation where the loonie is reflecting a lot of that right now.
It's going to take a lot more effort. The bar is higher for the loonie to continue to rise. The last time we were at $0.90 or even parity, the oil prices were in the hundreds of dollars. We're not forecasting that. So it could happen, but we think the Canadian dollar is pretty much at fair value right now. But look out for those commodity prices. If they keep surging, then the Canadian dollar will follow it upwards.
- James, thank you very much for your time.
- Thank you.
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