‘Positive signs’ that impact of COVID-19 on Canadian economy has peaked, BoC deputy governor says

The Bank of Canada is seeing “positive signs” that the economic impact of the COVID-19 crisis has peaked and that the Canadian economy will emerge better than some have feared, deputy governor Toni Gravelle said, but the central bank’s economic outlook still faces more questions than answers.

In a speech by video conference to the Greater Sudbury Chamber of Commerce on Thursday, Mr. Gravelle said that in the central bank’s deliberations leading up to this week’s interest rate decision, “We saw some reasons to be hopeful that the worst can be avoided.”

“Spending on cars and houses has picked up, and measures of consumer confidence have increased from the low levels recorded last month,” he said. “Further, we see signs that the various fiscal support measures put in place by governments have been effective in supporting income.”

The address – Mr. Gravelle’s first as a deputy governor, a position he assumed last October – serves as the bank’s “economic progress report,” an update speech following the four occasions each year that the bank issues a rate decision that isn’t accompanied by a Monetary Policy Report.

On Wednesday, the bank announced its decision to keep its key rate unchanged at a record-low 0.25 per cent, where it has been since the bank aggressively cut rates three times in March in response to the escalating COVID-19 crisis. In the rate announcement, the bank also scaled back some of its emergency measures designed to improve liquidity for banks and businesses, reflecting the improved financial market functioning in recent weeks.

The update speech is meant to provide a glimpse into the bank’s assessment of the economy in between the quarterly revisions of its formal forecasts in the MPR. The bank tweaked some of its rough estimates of the possible drop in gross domestic product from the COVID-19-related shutdowns – it now sees second-quarter GDP down about 12 per cent to 22 per cent compared with the 2019 fourth quarter, compared with an estimate in April of 15 to 30 per cent.

But Mr. Gravelle added there are still a lot of uncertainties about how the Canadian economy will act as it emerges from the lockdown, for which there are no historical precedents.

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

“As we get more data, we will have a better sense of the impact of the containment measures. These data will also help us answer a number of important questions,” he said. “What’s going to happen with business and consumer confidence? Will the pandemic lead to lasting changes in household saving and spending habits? How many companies will be unable to reopen their doors, and how many job losses will be permanent? How quickly will those people who lose their jobs be able to find other work? How will companies adjust or rebuild global supply chains? And so on.

“Ultimately, the stance of the bank’s monetary policy will depend a lot on what happens to the balance between what the economy can supply and what people demand, because this will affect the outlook for inflation," he said. “In the lead up to our July MPR, and beyond, it will be key for us to understand how the pandemic has affected demand, employment and the economy’s capacity to produce goods and services.”

The speech is not only Mr. Gravelle’s first, but is also the first by the Bank of Canada under new leadership. Tiff Macklem took over as the bank’s governor Wednesday, succeeding Stephen Poloz, whose seven-year term ended Tuesday.

Mr. Gravelle’s speech largely echoed the relatively optimistic message of a recovery that Mr. Poloz consistently delivered in his final weeks on the job. Mr. Macklem himself doesn’t yet have any public addresses scheduled before the next rate decision and MPR, in mid-July.

Mr. Gravelle also reiterated the central bank’s position that it considers its current key interest of 0.25 per cent to be the effective bottom – a view that Mr. Poloz has stated repeatedly and that Mr. Macklem also expressed when his appointment was announced last month.

“This is as low as we think we can reduce it without causing problems for the financial system,” he said.

“We realize these cuts won’t encourage a lot of extra borrowing and spending during this lockdown phase. But it will help people and businesses service their existing debt, and set the stage for the recovery."

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