BANK OF CANADA’S OP­TI­MISM SIG­NALS THAT THE WORST COULD SOON BE OVER

Pol­icy-mak­ers shift fo­cus to bring about eco­nomic re­cov­ery, Kevin Carmichael says.

Calgary Herald - - FP CALGARY -

Stephen Poloz over­saw the res­cue and Tiff Mack­lem will pi­lot the re­cov­ery.

COVID-19 will have a say in whether the lead­er­ship tran­si­tion at the Bank of Canada breaks as cleanly as that, but the cen­tral bank seems to think it’s pos­si­ble.

Poloz, whose term ended at mid­night on Tues­day, and Mack­lem, his suc­ces­sor, on Wed­nes­day re­leased some­thing of a joint in­ter­est-rate state­ment ex­press­ing con­fi­dence that the worst of the cri­sis was over, while in­di­cat­ing pol­icy-mak­ers were shift­ing their fo­cus to bring­ing about a re­cov­ery.

“As mar­ket func­tion im­proves and con­tain­ment re­stric­tions ease, the bank’s fo­cus will shift to sup­port­ing the re­sump­tion of growth in out­put and em­ploy­ment,” the state­ment said. “The bank main­tains its com­mit­ment to con­tinue large-scale as­set pur­chases un­til the eco­nomic re­cov­ery is well un­der­way. Any fur­ther pol­icy ac­tions would be cal­i­brated to pro­vide the nec­es­sary de­gree of mon­e­tary pol­icy ac­com­mo­da­tion re­quired to achieve the in­fla­tion tar­get.”

That di­rec­tion would have been set on Poloz’s last day, but the state­ment noted in an ad­den­dum that Mack­lem par­tic­i­pated in the gov­ern­ing coun­cil’s de­lib­er­a­tions as an ob­server and “endorses” the out­come. The cen­tral bank’s lead­ers opted to leave the bench­mark in­ter­est rate un­changed at 0.25 per cent and to scale back a cou­ple of as­set-pur­chase pro­grams that have been lit­tle used in re­cent weeks.

Poloz, who de­scribes him­self as an op­ti­mist, stayed true to his char­ac­ter and left on a rel­a­tively pos­i­tive note.

“De­ci­sive and tar­geted fis­cal ac­tions, com­bined with lower in­ter­est rates, are buffer­ing the im­pact of the shut­down on dis­pos­able in­come and help­ing to lay the foun­da­tion for eco­nomic re­cov­ery,” the state­ment said. “While the out­look for the sec­ond half of 2020 and be­yond re­mains heav­ily clouded, the bank ex­pects the econ­omy to re­sume growth in the third quar­ter.”

In April, when the Bank of Canada last up­dated its out­look, pol­icy-mak­ers opted against mak­ing a pin­point fore­cast, say­ing they pre­ferred to avoid “false pre­ci­sion,” since the volatil­ity of the sit­u­a­tion made it im­pos­si­ble to chart a course with a rea­son­able de­gree of con­fi­dence.

They in­stead of­fered a range of pos­si­bil­i­ties, start­ing with a pre­dic­tion that gross do­mes­tic prod­uct would de­cline be­tween one per cent and three per cent in the first quar­ter from the end of 2019, ahead of an his­toric drop of be­tween 15 per cent and 30 per cent in the April-june pe­riod from the fourth-quar­ter level.

From there, they said the econ­omy could head in any num­ber of di­rec­tions, in­clud­ing a best-case sce­nario of a fairly quick re­cov­ery to a dire sce­nario where the econ­omy takes sev­eral years to get back to where it was be­fore the cri­sis.

The Bank of Canada re­mains un­will­ing to make a de­fin­i­tive state­ment about the fu­ture. Pol­icy-mak­ers said the eco­nomic im­pact of COVID-19 “ap­pears to have peaked, al­though un­cer­tainty about how the re­cov­ery will un­fold re­mains high.” They also ob­served the global re­cov­ery will be “pro­tracted and un­even” be­cause coun­tries will be re­lax­ing their lock­downs on var­i­ous sched­ules.

At the same time, they ob­served the Cana­dian econ­omy ap­pears to have avoided the most se­vere sce­nario they thought pos­si­ble in April, ad­her­ing in­stead to a mid­dle path.

GDP dropped 2.1 per cent in the first quar­ter, and could de­cline an ad­di­tional 10 to 20 per cent this quar­ter, the state­ment said. That rep­re­sents an up­ward re­vi­sion, as the Bank of Canada now sees a de­crease in eco­nomic out­put of be­tween

While the out­look for the sec­ond half of 2020 and be­yond re­mains heav­ily clouded, the bank ex­pects the econ­omy to re­sume growth in the third quar­ter.

12 per cent and 22 per cent this quar­ter from the end of last year.

“The BOC sees light at the end of the tun­nel,” Sébastien Lavoie, chief econ­o­mist at Mon­treal-based Lau­ren­tian Bank, told his clients in a note. “The worst is be­hind us.”

The cen­tral bank said it would ta­per a cou­ple of its early bond-pur­chase pro­grams: It will now swap bonds for short-term loans only once a week, and will of­fer to buy bankers’ ac­cep­tances bi-weekly. It will con­tinue to pur­chase fed­eral, pro­vin­cial and cor­po­rate bonds as planned, en­sur­ing a source of de­mand for at least a por­tion of the debt that gov­ern­ments and com­pa­nies will is­sue to bridge the re­ces­sion.

“The bank’s pro­grams to im­prove mar­ket func­tion are hav­ing their in­tended ef­fect,” the state­ment said. “After sig­nif­i­cant strains in March, short­term fund­ing con­di­tions have im­proved.”

As­sum­ing that fund­ing mar­kets re­main stable, the de­bate will shift to what the cen­tral bank could do to stoke a faster re­cov­ery. Pol­icy-mak­ers, who are man­dated to hit an in­fla­tion tar­get of about two per cent, ac­knowl­edged the re­ces­sion has dropped the an­nual rate of price in­creases to near zero.

With the bench­mark rate es­sen­tially as low as it can go with­out se­ri­ously dis­tort­ing the fi­nan­cial sys­tem, the next best op­tion for the cen­tral bank is to in­crease its pur­chases of fi­nan­cial as­sets.

So far, the goal has been sim­ply to sta­bi­lize credit mar­kets. But it could po­ten­tially stim­u­late de­mand by in­creas­ing the vol­ume of pur­chases, or tar­get­ing a dif­fer­ent mix of as­sets to keep down­ward pres­sure on a wider range of re­tail and com­mer­cial in­ter­est rates.

“We be­lieve the Bank of Canada will con­tinue to ex­pand its bal­ance sheet un­til the end of the year to sup­port the re­cov­ery,” said Charles St-ar­naud, chief econ­o­mist at Al­berta Cen­tral in Cal­gary.

ADRIAN WYLD/THE CANA­DIAN PRESS FILES

New Bank of Canada gov­er­nor Tiff Mack­lem, left, has re­leased some­thing of a joint in­ter­est-rate state­ment Wed­nes­day with his pre­de­ces­sor Stephen Poloz, far right, ex­press­ing con­fi­dence that Canada is on its way to re­cov­er­ing from COVID-19 shut­downs.

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