The Guardian (Charlottetown)
Better news from Bank of Canada
Canada’s central bank has decided to ease back on the throttle, as revised calculations show the economy is on a much better trajectory than policy-makers anticipated at the start of the year.
Policy-makers said the improved outlook implies higher interest rates in the second half of 2022, instead of their previous assumption that they would need to keep the benchmark rate near zero until sometime in 2023 to bring about a sustained recovery. They also said they would taper their purchases of federal debt starting next week.
To be sure, the third-wave of coronavirus infections is a cause for concern at the central bank. It also remains unusually difficult to get a read on where the economy is headed because of the upheaval that has come in the wake of the pandemic. The Bank of Canada emphasized in its latest batch of communications on April 21 that “achieving a full recovery will take time” and that “strong and sustained growth will be needed to overcome the pandemic’s severe economic impacts.”
In other words, Governor Tiff Macklem will do what he needs to do to keep interest rates unusually low for a longer period of time than an orthodox approach to monetary policy would imply is appropriate.
“Even as economic prospects improve, the Governing Council judges that there is still considerable excess capacity, and the recovery continues to require extraordinary monetary policy support,” the central bank said in an updated policy statement said.
Still, one of the reminders of the past few months is that entrepreneurs, executives and consumers always find ways to adapt. So rather than buckle in the face of the second onslaught of COVID19 last winter, the economy pushed through the new headwind, posting an annual growth rate of seven per cent in first quarter, crushing the central bank’s previous prediction of a contraction over the first three months of 2021.
Overall, the central bank said that it now predicts that gross domestic product will grow at 6.5 per cent this year, compared with its previous estimate of four per cent, led by household consumption, housing, exports and extraordinary government spending. That means the economy is on track to fill in the massive hole left by the COVID recession by the end of the year, which would mark a swifter recovery than occurred after the Great Recession a decade ago.
The Bank of Canada is pointedly refusing to declare victory, but given those relatively happy facts, its leaders concluded their latest round of interest-rate deliberations with a decision to begin withdrawing some of their extraordinary stimulus. Macklem and his deputies on Governing Council said they would reduce their weekly purchases of Government of Canada bonds to $3 billion from $4 billion, a first step toward ending an extraordinary policy known as quantitative easing and putting it back in the armoury.
“This adjustment to the amount of incremental stimulus being added each week reflects the progress made in
the economic recovery,” the Bank of Canada said.
Policy-markers remain troubled by the outlook. There still are 300,000 fewer people working today than at the beginning of the pandemic, and the Bank of Canada noted the shortfall is actually roughly 475,000 if you take into account where population growth would have pushed employment if not for the epic recession.
Behavioural changes, such as the shift to e-commerce and a greater population that works from home, probably will lead to structural changes that aren’t reflected in the central bank’s history-based models. That makes trying to predict the future harder.
“The recovery remains highly dependent on the evolution of the pandemic and the pace of vaccinations,” the central bank said.