This morning, the Bank of Canada left its target overnight benchmark rate – the main tool used by the BoC to conduct monetary policy – unchanged at what it previously described as its lower bound of ¼ percent. As a result, the Bank Rate remains at ½ percent.
This decision was expected after the BoC lowered its target for the overnight rate 150 basis points in March.
However, this announcement and the Bank’s accompanying July Monetary Policy Report (MPR) were noteworthy in that they included some new observations on the state of the economy, including inflation and the near-term outlook.
Additionally – and of importance to all businesses, households and capital market participants – the Bank also reinforced its commitment to large-scale asset purchases: otherwise known as Quantitative Easing (see “Extraordinary Monetary Support” below.)
Here are some of the Bank’s observations we found most revealing:
- Recent monthly data for employment, motor vehicle sales and housing suggest that the Canadian economy “hit bottom in April” job growth resumed in May and “accelerated in June.”
- The Canadian economy is now starting to recover after output fell by an estimated 15 percent in the second quarter compared to the end of 2019 – representing “the deepest decline in economic activity since the Great Depression.”
- This economic decline was “considerably less severe than the worst scenarios presented in the April MPR.”
- “Decisive and necessary” fiscal and monetary policy actions have supported incomes and kept credit flowing, cushioning the fall and laying the foundation for recovery.
- After a sharp drop in the first half of 2020, global economic activity is also “picking up” and this “return to growth” reflects the relaxation of necessary containment measures put in place to slow the spread of the coronavirus combined with fiscal and monetary policy support.
- Financial conditions have improved.
- There are early signs that the reopening of businesses and pent-up demand are leading to “an initial bounce-back in employment and output.”
- Economic “slack” is likely to persist as the recovery in demand lags that of supply, “creating significant disinflationary pressures.”
- CPI inflation is “close to zero” and is expected to remain weak before “gradually strengthening toward 2 percent” as the drag from low gas prices and other temporary effects dissipates and demand recovers.
Extraordinary Monetary Support
As the economy moves from “reopening to recuperation,” it will continue to require extraordinary monetary policy support, according to the Bank’s Governing Council. Consequently, BoC announced today that it will hold its policy interest rate at the effective lower bound until inflation returns to the 2% target at a sustainable level. To keep interest rates low across the yield curve, the Bank announced it will continue to purchase at least $5 billion – per week – of Government of Canada bonds.
Current provincial and corporate bond purchase programs will also continue.
Despite providing encouraging comments about the revitalization of the economy, the central bank noted that the outlook is “extremely uncertain” because of the unpredictability of the course of the COVID-19 pandemic. As a result, its MPR for July presents a central scenario for Canadian and global growth rather than economic projections. This central scenario assumes no widespread second wave of the virus but that it will be the middle of 2022 before COVID-19 runs its course.
In this central scenario, the Bank predicts that the Canadian economy will shrink by almost 8 percent this year before growing by just over 5 percent in 2021 and almost 4 percent in 2022.
More immediately, the Bank expects to continue to see a strong rebound in jobs and output in the third quarter of 2020 but that the “exceptionally strong near-term growth of the reopening phase is likely to give way to a slower and bumpier recuperation phase.”
As a result, the Bank believes it will “take a long time for economic activity to get back even to the level where it was at the end of 2019, before the pandemic struck.”
BoC’s next scheduled policy announcement is September 9, 2020. In the meantime, First National will continue to do its part in contributing to your growth and the resurgence of the Canadian economy through our market-leading single family and multi-family commercial lending operations.
Should you have any questions, please contact your First National advisor.