The Bank of Canada left its monetary policy levers unchanged in its latest rate decision, noting that the pace of vaccinations is setting the stage for a strong economic rebound over the summer, even as the most recent round of lockdowns has dampened business activity in the second quarter.
The central bank kept its overnight policy rate at 0.25 per cent Wednesday, where it has been since March, 2020, and reiterated that it does not expect to hike interest rates until the second half of 2022 at the earliest. Likewise, it maintained its $3-billion-a-week target for government bond buying, also known as quantitative easing, which was in line with analysts’ expectations.
“With vaccinations proceeding at a faster pace, and provincial containment restrictions on an easing path over the summer, the Canadian economy is expected to rebound strongly, led by consumer spending,” the bank said in its rate decision.
“Housing market activity is expected to moderate but remain elevated. Strong growth in foreign demand and higher commodity prices should also lead to a solid recovery in exports and business investment,” it said.
The statement-only rate decision follows a significant policy shift in April, when the bank revised its economic outlook upward, scaled back its bond purchases and pulled forward its timing for a potential rate hike.
In its Wednesday decision, the bank was balancing recent above-target inflation against weak economic data from April and May, when much of the country was back in lockdown. Real GDP fell 0.8 per cent in April – the first drop in a year – according to preliminary estimates published by Statistics Canada last week. The country shed 207,100 jobs that month and another 68,000 in May.
Growth in the first quarter of the year came in at 5.6 per cent, below the bank’s 7-per-cent quarterly growth forecast in April.
The bank acknowledged the miss but said “the underlying details indicate rising confidence and resilient demand.” It said recent economic developments are “broadly in line” with its April forecast.
“The willingness of policymakers to shrug off what could be a big miss on their first-half growth forecast clearly points to a hawkish bias,” Benjamin Reitzes, the director of Canadian rates and macro strategist at BMO Capital Markets, wrote in a note.
On inflation, the bank continued to talk down the recent spike in the Consumer Price Index, which rose 3.4 per cent in April, the fastest annual pace of inflation in almost a decade.
The jump was largely the result of year-over-year comparisons for the price of gasoline, which tanked in the early months of the pandemic. But there was also a broad-based increase in prices month to month that are not explained by “base-year effects.” The average of the three core inflation metrics favoured by the bank moved above its 2-per-cent target in April.
“While CPI inflation will likely remain near 3 per cent through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure,” the bank said.
The bank’s April Monetary Policy Report projects 2.3-per-cent inflation in 2021, 1.9 per cent in 2022 and 2.3 per cent in 2023.
The bank continued to highlight the uneven impact the pandemic has had on Canadian workers. This has been a major theme in recent months for bank governor Tiff Macklem, who has said he is looking for a “complete recovery” that brings the hardest-hit workers – women, racialized communities and young people – back into the labour force.
The bank said little about the strong Canadian dollar Wednesday, only noting that “commodity prices have risen further, notably oil, and the Canadian dollar has seen a further appreciation.”
“The bank’s lack of concern [about the Canadian dollar] may be partly because the large appreciation will act as a pressure valve for inflation, by causing imported goods prices to fall later this year,” Stephen Brown, senior Canada economist at Capital Economics, wrote in a note.
“The bank did not show any concern about the booming housing market either, which suggests it has no intention, at least for now, to bring forward its tightening plans to counter the strength of house prices,” he wrote.
Most economists expect the bank to reduce its pace of government bond buying to $2-billion a week from $3-billion in the summer or early fall, with analyst consensus favouring a July “taper.”
“We had been expecting the next taper to come in October, as we’ll have precious little evidence of the recovery’s strength in July, but today’s statement suggests the bank wants to act sooner rather than later,” Mr. Reitzes of BMO wrote.
In recent weeks, the bank has shown a new flexibility with its quantitative easing program, undershooting the weekly $3-billion target in each of the past two weeks. This comes after it changed the language around the program in April, going from buying “at least” $4-billion a week to “a target” of $3-billion a week. This was done to provide “greater operational flexibility,” a bank spokesperson said this week.
The bank reiterated Wednesday that QE decisions will be guided by an “ongoing assessment of the strength and durability of the recovery” – the same language it used in April. Mr. Macklem said in April that “if the recovery evolves in line with or stronger than in our latest projection, then the economy won’t need as much QE stimulus over time.”
While the bank stood pat on monetary policy this week, it remains ahead of other major central banks in dialling back the emergency stimulus put in place early in the pandemic. There was no speech or news conference Wednesday, but deputy bank governor Tim Lane will give a speech Thursday about Canada’s digital transformation.
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