The Morning Brief – 04.22.21

By Bruce Carson


Yesterday the Bank of Canada announced that interest rates would remain at 0.25% and during the week of April 26, weekly net purchases of Government of Canada bonds will be set at $3 billion down from the previous $4 billion.

The economic recovery is progressing.

The Bank of Canada is more optimistic than the Government of Canada regarding GDP growth in 2021.

Will moving up the date by which interest rates could rise from 2023 to the second half of 2022, affect the government’s borrowing costs to provide stimulus?

Since the beginning of COVID-19 and the decision by the Bank of Canada to maintain interest rates at 0.25% through 2023, these monthly rate announcements have become dull, tedious and predictable affairs, even when the quarterly Monetary Policy Report is part of the discussion. The only real question from month to month seemed to be how much would the Bank spend on bond purchases under its quantitative easing program.

This wasn’t the case yesterday as the Bank presented a pretty rosy picture of a growing Canadian economy even after the second wave of the pandemic and into the third wave with variants of concern. The economy is doing well enough for the Bank to pull back its bond buying to $3 billion from $4 billion in previous weeks.

It was noted in the rate announcement that the economic outlook for both global and Canadian economies has improved, particularly as vaccines roll out. Global growth forecast is pegged at 6.75% in 2021, 4% in 2022 and 3.5% in 2023. Most important for Canada is the recovery in the United States is “particularly strong” based on fiscal stimulus and rapid vaccine roll out. U.S. growth could reach an annualized rate of 10% in Q2. As Canada’s largest trading partner, when the U.S. economy is growing it usually has a positive effect on Canada’s economy.  Also beneficial for Canada is the fact that commodity prices have improved, in particular oil.

Canada’s growth in Q1 is much stronger than had been forecast by the Bank in January’s Monetary Policy Report. GDP growth of 6.5% in 2021, 3.7% in 2022 and 3.25% in 2023 is now forecast by the Bank. It should be noted that this is 2.5% higher than the January forecast and also higher than that advanced by the Government of Canada in Monday’s budget, 5.8% growth.

The Bank sees the economy reopening as vaccines roll out and will rebound strongly in the second half of 2021 remaining robust.

There is concern regarding the fact that house construction and resales are at historic highs driven by low mortgage rates, desire for more space brought on by the pandemic and limited supply. The Bank will be monitoring the risks associated with the rapid rise in house prices. A great deal of time was devoted to this subject in the Q and A session following the rate announcement.

Governor Macklem said that people want more space, but is concerned about the market now being overstimulated. He supports a more stringent mortgage stress test as set out by the Office of the Superintendent of Financial Institutions, but worries that people will believe that prices will continue to rise and overstretch themselves financially. Macklem also supports the measures in the budget dealing with a tax on vacant homes as a vacant home means stock is being taken off the market.

With regard to inflation, it is expected to rise over the next few months to the top of the 1% -3% band. Prices are recovering from the drop that occurred at the beginning of the pandemic and oil prices increased in December. Both WTI and Western Canadian Select are up US$10 to US$15 per barrel.

The Bank expects CPI inflation to ease back to 2% over the second half of 2021 and ease further because of excess capacity.

In the press conference, Governor Macklem stressed that the economic outlook has improved with vaccines but Canada is not yet near full recovery as most provinces are dealing with variants and many Canadians remain without jobs. He stated that the toll of the pandemic has been “immense.”

However, he does have confidence in the recovery with strong growth based on consumption, support from the government and higher commodity prices and that is why the Bank expects growth at 6.5%.

In the Q and A session Macklem was asked about the most surprising revelation in the rate announcement and the Monetary Policy Report being the fact that the time for actively contemplating an interest rate hike is now in the second half of 2022 as opposed to some point in 2023. He made it clear that this did not mean there would be an automatic rate hike, but the change was based on the fact we have a better economic outlook.

“The Bank is looking for a complete recovery” offered Macklem.

He was asked what he meant by “complete recovery.” Macklem replied that Canada still had a long way to go as there are weak sectors in the economy and too many Canadians remain unemployed. But the economic outlook is better.

The Governor spoke of three matters of importance; progress, time and commitment. Progress is leading to a better outlook with vaccines being rolled out. However it is still going to take time to get to full recovery, particularly with variants hurting the economy and still too many Canadians unemployed. He said the bank is committed to supporting Canadians through to the end of the pandemic.

With the U.S. Fed meeting next week, April 27-28, the fact that Canada’s central bank has signalled rates could rise in the second half of 2022, instead of 2023 could become a matter for discussion.

Fed Chair Jerome Powell said during a 60 Minutes interview in mid-April that the American economy was at an “inflection point” but COVID was still a risk to jobs and growth. Powell said “the principal risk to our economy right now really is that the disease would spread again.” He stated that people should practice social distancing and wear masks. He added that the Fed will do everything we can to support the economy as long as it takes to complete the recovery.

It will be interesting to compare the results of next week’s Fed meeting regarding interest rates with what we heard from the Bank of Canada yesterday.

Janice MacKinnon quoted in The Morning Brief yesterday offered advice to the Trudeau government not to spend all of the stimulus money at once. Given the Bank’s comments on the growing strength of the Canadian economy, she may very well be right.

A question for Minister Freeland coming from the Bank’s announcement yesterday is what effect will rates possibly rising in the middle of next year have on the government’s recovery plan?

To Come

Today & Tomorrow
  • President Biden hosts an international conference on climate change
April 27-28
  • U.S. Fed meets
April 28
  • Retail trade numbers for February to be released
April 30
  • GDP numbers for February to be released

The Morning Brief returns on Wednesday, April 28 with more budget analysis.

– BC