The Morning Brief – 12.10.20

By Bruce Carson


Bank of Canada maintains interest rates at 0.25% and reiterates forward guidance

First Ministers meet today to deal with the health transfer, COVID-19 and vaccines

On October 28, the Bank of Canada’s Governing Council in its communique stated that the economy as it recuperates will require extraordinary monetary policy support. The Bank “will hold rates where they are until the economic shock is absorbed and 2% inflation target is substantially achieved.” It projected this not occurring until 2023.

The Bank stated “we are committed to providing the monetary stimulus needed to support the recovery and achieve the inflation objective.”

The growth projection set out then for the fourth quarter was that it would be “very modest.”

Governor Macklem in the Question and Answer session following the Bank’s announcement reiterated 2023 as the date when forward guidance, low interest rates, may come to an end. “We will keep the rates where they are until 2023” he said in response to a question from David Akin.

Basically yesterday morning in its communique the Bank reiterated the points made on October 28. Amplification will be provided by Deputy Governor Paul Beaudry in a speech later today.

While the Bank yesterday maintained the interest rate at 0.25%, it also reinforced its commitment to what it called “extraordinary forward guidance” and its quantitative easing program.

The Bank noted the success with vaccine development and the reassurance it provides that the pandemic will end and more normal activities will resume. Stronger demand is pushing up commodity prices, including oil. The Canadian dollar has appreciated against the U.S. dollar affecting the cost of Canada’s exports. If this continues, it could become a headwind in Canada’s economic recovery.

Record cases of COVID-19 have forced reintroduction of restrictions, business closures and requirements for Canadians to stay home or work from home. The Bank predicts this will negatively affect growth in Q1 of 2021. Growth will be “choppy” until vaccines are widely available.

As far as inflation is concerned, it is forecast to stay below 2% as the considerable amount of economic slack is expected to continue to weigh on inflation.

The Bank concluded “Canada’s economic recovery will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In our October projection, this does not happen until into 2023.”

The Council concluded “we remain committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

On November 30, Finance Minister Freeland presented the government’s fall economic update which in addition to setting out a deficit of $381 billion at a minimum for 2020-2021 also contained a commitment to spend $70 to $100 billion on stimulus once the pandemic is declared to be over by the Trudeau government.

The government’s stimulus spending is based on ‘lower for longer interest rates.’

The question is, given the commitment of the Bank to keep rates low into 2023 and the promise by the government to spend billions on stimulus while relying on these low rates; will these two commitments collide given that the government’s stimulus spending is occurring as we move out of the ‘lower for longer interest rate’ commitments by the Bank of Canada?

No doubt the government will have locked in some borrowing at these lower rates, but if the bulk of stimulus spending does not occur until after 2023, will the lower rates continue? If not, the cheap money which Minister Freeland and now Deputy Minister Sabia are counting on to fund stimulus may not materialize to the extent originally thought.

On January 20, the Bank will once again deal with interest rates and present its Monetary Policy Update.

Today, First Ministers are meeting to discuss three matters; health care funding for provinces and territories, COVID-19 and vaccines.

The vaccine topic has become infinitely easier to deal with as a result of the prime minister’s announcements on Monday that the Pfizer vaccine, in limited quantities, will soon be arriving in Canada. Yesterday, Health Canada approved the Pfizer-BioNTech vaccine, making this week’s dry run, a very real and important exercise.

Premiers will have questions as to delivery, when will the first batch arrive and when will the Moderna vaccine be approved as it seems less fragile than Pfizer’s. It could better serve those in long term care facilities, Indigenous Canadians in remote locations and those living in the territories.

The initial purpose of the meeting today was to discuss long term, stable and predictable funding for health care delivered by the provinces and territories. This is funding required beyond that contributed by the Trudeau government to the provinces in response to COVID-19.

The amount sought by the provinces is $28 billion on a recurring basis. This means increasing the federal share from 22% to 35%.

The federal government may respond to this ask by saying that the increase will have to be spent on federal priorities such as mental health and home care. The Globe’s John Ibbitson in his recent column on this meeting states that “in reality the provinces will spend it as they see fit” while writing up a nice annual report.

It is hard see agreement coming out of this meeting, but, perhaps a two stage solution might be found. An increase in health transfers, not $28 billion and an agreement to meet to discuss how fiscal policy, tax points, could be used to provide a more permanent solution as Canada’s population ages, with the provinces and territories on the front lines providing needed health care. Premier Ford would like to see discussions wind up in time for the federal government to put the money needed for this transfer in its spring budget.

To Come

  • FMM to take place virtually
  • Anniversary of the kidnapping and illegal incarceration of Michael Spavor and Michael Kovrig by China
  • The PBO releases a report entitled “Fall Economic Statement: Issues for Parliamentarians”
  • Bank of Canada Deputy Governor Paul Beaudry delivers a speech dealing yesterday’s interest rate announcement
December 11
  • House of Commons scheduled to rise for winter break
December 15
  • Bank of Canada Governor Tiff Macklem delivers a speech to the Greater Vancouver Board of Trade
December 16
  • CPI numbers for November to be released
December 18
  • Retail trade numbers for October to be released

The Morning Brief returns on Wednesday, December 16.

– BC