The Bank of Canada will look to business and consumer-confidence indicators for guidance on how seriously the coronavirus is affecting Canada’s economy, senior deputy governor Carolyn Wilkins said on Wednesday.
“At the end of the day, what it comes down to for us is looking at the data to see what they point to in terms of confidence of business, the consumer – and what that means for growth and what that means for meeting our inflation target,” Ms. Wilkins said in an audience question-and-answer session after a speech in Toronto. “We already said that we’re looking at all those data. It just means that we’re going to have to concentrate a bit more on it.
“It’s never a good time to have an outbreak like this. But when the global economy is feeling a little fragile, we’ve got mixed data in Canada, it’s certainly not great timing,” said the central bank’s second-in-command, who is widely considered the front-runner to succeed Stephen Poloz as governor when his term ends in June.
Economists have been scrambling to get a handle on the economic risk posed by the coronavirus, amid fears that gripped the financial markets in late January that the outbreak could upend a global economy already weakened by trade turmoil and geopolitical uncertainty. Bond traders last week began to price into the market the possibility that the Bank of Canada will cut interest rates this year, although they retreated somewhat from that position this week.
Ms. Wilkins said experience has shown that outbreaks “can affect Canada, even if they’re not happening in Canada – or at least not to the extent today as they are in China.”
“We see that through a number of channels. It can come through lower oil prices, lower commodity prices – we’ve seen a bit of that. Less travel – so the tourist industry, the transportation industry could find themselves a little offside their forecasts for a little while. And at the same time, supply chains ... become disrupted,” she said.
“The way to look at it from a policy perspective is to just dissect, well, how would it turn out if it doesn’t last very long? That temporary feeling is going to maybe look a bit like SARS in 2003,” she said, referring to the severe acute respiratory syndrome pandemic, which included a significant outbreak in Toronto.
While the Canadian economy suffered a serious setback during the second quarter of 2003, at the peak of SARS in Toronto, the Bank of Canada’s calculations indicated the effects were largely reversed once it passed, and had little ultimate impact on overall economic growth.
However, she said that if the outbreak proved longer-lasting, the Bank of Canada would have to reassess if it posed a more serious risk to the its economic outlook.
If business and consumer confidence decline, it might indicate that interruptions to investment and spending could affect the economy more broadly. The Bank of Canada conducts quarterly surveys that gauge business and consumer sentiment; the next release is scheduled for early April.
The Conference Board of Canada’s monthly index of consumer confidence rose to a five-month high in January, but the survey was conducted before coronavirus began to dominate global headlines. The next one is expected in late February.
Ms. Wilkins’s speech focused on issues surrounding the future of monetary policy in an environment of slower economic growth potential and, as a consequence, lower interest rates than in the past. She noted that because of aging populations and slowing productivity growth, prevailing rates of interest are about 2 percentage points lower than they were in the early 2000s – leaving central banks “less room to stimulate the economy in the traditional way” by reducing rates.
She said this will be a key consideration as the Bank of Canada reviews its monetary policy framework this year in preparation for the five-year renewal in 2021 of its agreement with the federal government on its inflation target. The bank will launch public consultations this spring.
Ms. Wilkins said the central bank will conduct research on options for its policy framework beyond the target of keeping inflation at 2 per cent, which has served as its formal guide to rate policy for a quarter-century. She said the bank will run “model-based simulations” to test the impact of various options on inflation, economic and job growth, and financial stability.
The bank will look at the effects of balancing periods of below-target inflation by temporarily aiming for above-target inflation, and vice versa; using nominal gross domestic product as a target rather than inflation; and adopting a dual mandate of both an inflation target and full employment, as the U.S. Federal Reserve does.
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