BoC eyeing supply and demand for July economic outlook

OTTAWA — The Bank of Canada will be paying close attention to what the post-pandemic economy can supply and what consumers demand, deputy governor Toni Gravelle said Thursday.

It is possible that supply could recover faster than demand if businesses reopen quickly, but consumers remain cautious, Gravelle said.

In a speech by video conference to the Greater Sudbury Chamber of Commerce, Gravelle said it will be key for the bank’s governing council to understand how the pandemic has affected demand, employment and the economy’s capacity to produce goods and services by mid-July.

At that time, the bank will release an updated economic outlook for the country and make its next interest rate announcement.

The Bank of Canada held its key policy rate at 0.25 per cent on Wednesday, but said the economy appears to have avoided a worst-case scenario due to the COVID-19 pandemic.

The bank also reduced some of its market operations after it “cranked up the volume to 11” to allow the banking system to tap directly into much-needed funding liquidity, Gravelle said.

“Despite the positive signs, though, many risks and uncertainties remain,” Gravelle said, according to a text of his speech released by the bank.

“A lot will depend on whether we as a country are successful in managing the risk of possible future waves of COVID-19, and the pace at which containment measures are lifted,” Gravelle said.

“This applies to the global economy as well as Canada’s.”

He said the bank will pay close attention to how the pandemic is affecting growth and demand in key markets for Canadian exports.

Statistics Canada said the domestic economy shrank by 2.1 per cent in the first three months of the year.

The Bank of Canada now expects output to drop a further 10 to 20 per cent in the second quarter, which is below its April expectations of a 15 to 30 per cent drop.

As bad as that sounds, Gravelle said, it would be closer to a best-case scenario the bank envisioned in April.

Gravelle pointed in his speech to silver linings in otherwise gloomy economic data.

Statistics Canada jobs figures showed that three million workers became unemployed over March and April as the pandemic took hold, but 43 per cent said they expected to return to their jobs once the pandemic passes.

Gravelle said that figure was 15 per cent during the global financial crisis over a decade ago

“This suggests that many of these people may be back to work as the containment measures are lifted, although this is by no means assured,” Gravelle said.

Inflation has dropped close to zero, driven mainly by plunging gasoline prices, but Gravelle says inflation will remain below the bank’s two per cent target in the near-term due to temporary factors.

“We saw some reasons to be hopeful that the worst can be avoided,” Gravelle said.