The Morning Brief – 07.15.21

By Bruce Carson


The Bank of Canada did yesterday what was expected of it; keep the overnight interest rate at 0.25% where it has been for quite a while and second, taper quantitative easing.

The move to reduce bond purchases was widely viewed as a given with the C.D. Howe Institute and others calling for a reduction in these purchases, but the Institute also suggested a hike in interest rates, starting this fall and by next July rates would be 0.50%.

That advice wasn’t taken.

While the Bank’s growth forecast was slightly below where it was in the last Monetary Policy Report (MPR), it still forecasts fairly robust GDP growth of 6% for 2021.

Overall, Bank of Canada Governor Macklem took what seemed to be a cautious approach using the word “uncertainty” numerous times.

Are there political lessons to be taken away from yesterday’s announcement?

The most interesting part of the rate announcement when it is accompanied by the MPR occurs when the Governor delivers his remarks at his media availability held after the documents are released.

The headlines coming out of yesterday morning were about unchanged interest rates and the quantitative easing program adjusted to $2 billion per week as this reflects continued progress towards recovery. But continuing with the theme of uncertainty, which reflects the unpredictability of COVID-19 and its variants, Macklem described the path to recovery as “bumpy and scars will remain.”

This recovery, unlike the period after the 2008-2009 recession will not move in a straight upward trajectory. 2021 is so different from 2008-09 because now the world is dealing with a common enemy and its variants and there is no certain path to full recovery, particularly as the disease has to be beaten everywhere.

Although he didn’t say it outright, it seems obvious that allowing inflation to rise above 3% is part of the Bank’s plan to cope with uncertainty.

As the Bank’s announcement stated when dealing with the global outlook “the recovery is uneven” and it is dependent on the virus. “The spread of COVID and its variants is a growing concern, especially in areas where vaccinations are low.”

However, the outlook for global growth is 7% in 2021, 4.5% in 2022 and around 3% in 2023. This is all good news for Canada with its trade dependent economy. Also the U.S. economy is growing at a robust rate, again putting Americans in a positon to buy Canadian exports.

With regard to Canada, the Bank noted that with the advent of the third wave, slower growth in Q2 was the result, slower than the Bank had previously predicted. However the Bank believes there should be “strong pick-up” in the second half of 2021 based on the rate of vaccination and the easing of restrictions.

It is forecast that GDP growth will come in at 6% in 2021, 4.5% in 2022 and 3.25 % in 2023.

Recovery will be led by consumption with exports helped by strong international demand.

The pace of recovery will vary among industries and workers as the Bank notes it “could take some time to hire workers with the right skills to fill jobs.”

On the critical subject of inflation which affects the price of what we buy and consume, the Bank seems content to let it move beyond the 3% bound, at least for now.

While the most recent inflation numbers in May were 3.6% and we will receive up to date numbers for June on July 28, the Bank forecasts inflation at 3% through the second half of 2021, with it easing back to 2% in 2022. Macklem describes the “factors pushing up inflation as transitory” and the Bank will monitor them closely.

In the Q and A session, Macklem was questioned a few times about the Bank’s position on inflation, particularly the view that it is transitory. The response was that one of the three temporary factors driving inflation is the increase in the price and use of gasoline.

A second part was that prices of goods are normalizing as opposed to decreasing as they were at the beginning of the pandemic. And finally, there are supply bottlenecks as we deal with the resumption of global shipping as well as the shortage of semi-conductors and that has affected the price of both new and used cars.

A question followed on the outlook for mid-term inflation and the answer was simple; the Bank has an upper bound of 3% regarding inflation.

Political Implications of the Monetary Policy Report

This is the last MPR that will be delivered by the Bank before the fall. If the predictions of a late summer or early fall election come to pass, it will be the last MPR before the election.

This means there are a few matters that political leaders should note.

  1. GDP growth in 2021 is predicted to be around 6%. The economy will be recovering based on consumption and investment, not stimulus spending.
  1. According to the Bank, Canadian exports should grow as demand increases from the U.S. and Europe.
  1. Inflation is forecast to rise and for a political party hoping to win an election, the price of goods and services increasing for consumers, even if it is transitory is not an ideal situation. Also the thought of interest rates rising to curb inflation is not ideal either. This could irritate an electorate that is tired of fighting COVID.
  1. The MPR makes it clear that full employment is still a ways off. It notes there is “significant labour market slack” and given population growth roughly 500,000 people will need to be hired to reach pre-pandemic levels.
  1. Political leaders should pay attention to Macklem’s references to “uncertainty” and his phrase that the recovery will be “bumpy and scars will remain.”

This should provide a warning that within the Writ period, should an election be called, even more than usual may be unpredictable.

To Come

  • Report dealing with the Kamloops residential school will be released
  • The PBO releases another costing note
July 23
  • Retail trade numbers for May to be released
July 26
  • Installation of the Governor General
July 28
  • CPI numbers for June to be released
July 30
  • GDP numbers for May to be released

The Morning Brief returns next Thursday, July 22.

– BC