Bank of Canada keeps its foot on the gas, but hints at changes to come

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Canada’s central bank is getting ready to take its foot off the gas, but for now, it intends to proceed at full throttle.

The Bank of Canada acknowledged in an updated policy statement that the economy will avoid the first-quarter contraction that the institution’s forecasters predicted at the start of the year, perhaps the best indication that policy-makers are feeling better about the country’s prospects. Their latest deliberation coincided with the passage of President Joe Biden’s US$1.9-trillion stimulus package through Congress, representing an historic jolt to the U.S. economy that will generate increased demand for Canadian exports.

“The economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures,” policy-makers said on March 10. “Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected. Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment.”

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Indeed. Gross domestic product jumped to annual rate of 9.6 per cent in the fourth quarter, forcing Bay Street economists to upgrade their outlooks for 2021. Commodity prices have surged along with the global recovery, allowing Canada to record a rare trade surplus in January — and the widest one since July 2014. The real-estate market is so hot that Bank of Canada Governor Tiff Macklem said last month that he was starting to see early signs of “excess exuberance.”

Still, the hole left by the COVID-19 crisis is immense and the climb out will be long. Macklem and his deputies on Governing Council mostly brushed aside worries about inflation, which some investors and traders think will soon force central banks to backtrack on their promises to keep interest rates unusually low for another couple of years at least.

The Bank of Canada reiterated that it intends to keep the benchmark interest rate at 0.25 per cent until sometime in 2023, and that it will continue to create money to purchase at least $4-billion worth of Government of Canada bonds each week “until the recovery is well underway.” It attributed the recent jump in bond yields to repricing related to the “improved U.S. growth outlook.” Policy-makers observed that inflation, as measured by the Consumer Price Index, is on the low side of their comfort zone, and that they expect economic weakness will continue to exert downward pressure on prices for a while yet.

“While economic prospects have improved, the Governing Council judges that the recovery continues to require extraordinary support,” the statement said.

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Still, the Bank of Canada is keeping on eye on the economic dashboard, where more and more indicators are coming up positive. Policy-makers reiterated that the pledge to keep the benchmark rate near zero is based on their outlook in January, which is now outdated. A continued run of strong numbers could force a tweak to the timing of higher interest rates.

Macklem and his deputies also hinted they could be getting closer to tapering their asset purchases. “As the Governing Council continues to gain confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required,” they said.

They next meet to discuss interest rates in April. If current trends continue, that adjustment could occur then.

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