Bank of Canada keeps rates pinned as bumpy economic outlook belies recent recovery
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“The new language perhaps hints at a possible taper in the future, though there is no sign of an imminent change,” Simon Deeley, a strategist at RBC Dominion Securities Inc., said in a note to clients. “We continue to see any lowering of the (federal government) bond purchase level in the near term as premature.”
Ultimately, the Bank of Canada’s only job is to keep inflation around two per cent, and current readings suggest the central bank will have to let the economy run hot for a while to fulfil its mandate.
The Consumer Price Index (CPI) increased only 0.1 per cent in July from a year earlier, and the Bank of Canada’s latest projections imply it will be at least a couple of years before the economy gains enough strength to put sustained upward pressure on prices. “CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term,” the statement said.
To be sure, the Bank of Canada’s forecast specialists were conservative in July when they helped their bosses construct a “central scenario” of how Canada’s economy might recover from an epic collapse. The summer Monetary Policy Report assumed that gross domestic product free fell at an annual rate of 43 per cent in the second quarter, and would rebound at a rate of about 31 per cent in the third quarter.
GDP actually dropped at an annual rate of about 39 per cent between April and June, Statistics Canada reported on Aug. 28. The extraordinary level of government support for households appears to have offset a significant amount of the immediate damage resulting from effectively closing the economy for most of the spring. That should mean a stronger “reopening” phase as lockdown measures were eased heading into the summer.
