The Morning Brief – 03.11.21

By Bruce Carson


No changes announced yesterday from the Bank of Canada

Interest rates are still at 0.25% until mid-2023 and quantitative easing remains in place

As the economy heats up, will this change?

What about inflation, Bank says it will rise mid-year, and then return to the lower bound

Has the Bank misjudged the strength of the economic recovery at this point?

As stated, yesterday the Bank of Canada in a release maintained the overnight rate at the lower level of 0.25%. The Bank will support this forward guidance by quantitative easing, buying $4 billion in government bonds per week.

With regard to the global economy, the Bank sees recovery from the economic effects of COVID, but recovery is uneven across regions and sectors. The United States economy was described as “gaining momentum” based on the fiscal support now in place. This will increase incomes and provide cash to increase consumption of goods and services.

The Bank stated that oil and other commodities have seen a rise in prices.

In relation to Canada, the Bank noted that the economy was more resilient than anticipated. GDP was up 9.6% on an annualized basis in Q4 of 2020 as businesses accumulated inventory. Also GDP growth in Q1 of 2021 is now expected to be positive rather than contracting which was the forecast from the Bank in January. The Bank did not explain why it got growth in Q4 of 2020 and Q1 of 2021 so far off from reality. Perhaps those questions will be answered when the Bank presents its Monetary Policy Report in April.

In Canada the housing market was much stronger than expected, which CMHC did not anticipate. Also exports are on the rise due to increased foreign demand and high commodity prices. This should set the stage for increased business investment.

However, the release from the Bank stated that there is “still considerable economic slack” and uncertainty about the virus and the “path of economic growth.”

The downside in all of this is that the labour market is still struggling and far from recovery. Employment is still well below pre-COVID-19 levels. Low wage workers, young people and women suffered the greatest job losses and that situation continues.

It will be interesting to see if there is a significant recovery when the job numbers for February are released tomorrow.

According to the Bank, the largest domestic risk is the spread of transmittable variants of COVID. This could be in the form of local outbreaks and more restrictions would have to be applied which would restrict economic growth. The Bank stated that this would add “choppiness to the recovery.”

With regard to inflation, which is a major concern of many economists, the Bank believes it will stay at the bottom of the band, but could move close to the top in the next few months but is then expected to “moderate.” The fluctuations in inflation, when it occurs, could result in calls for higher interest rates. This will place the Bank in an interesting position as it has vowed to maintain rates where they are until 2023.

The Communique concluded “while economic prospects have improved, Governing Council judges that the recovery continues to require extraordinary monetary policy support.” Rates will be kept at the lower bound until 2023, reiterated the Bank.

Also, “the Bank will continue its quantitative easing program until recovery is well underway.” In addition “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.”

In case there was any doubt the Communique closes with “we will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”

Reuters commented that the general growth outlook was good as there is a red hot housing market, surge in oil prices and now a huge U.S. fiscal stimulus package which will undoubtedly benefit Canada.

One conclusion in the article by Fergal Smith of Reuters was that the Bank of Canada could hike interest rates next year as the economy improves. However, it is noted that this suggestion will be resisted because of high unemployment, meaning that hikes when they come, will be in 2023 when the Bank believes the economy will reach its full potential.

Dave McKay, CEO of RBC  said Tuesday at a financial investors conference that he believes inflationary pressures will force central bankers to start raising rates as soon as next year. He sees large amounts of consumer liquidity plus vaccines and new stimulus programs leading to economic growth.

He believes that the recovery will come in hardest hit sectors such as hospitality and food, using up excess capital this year ahead of next year. He believes the Bank may have to respond in the latter half of 2022 with a rate hike, ahead of schedule.

Kevin Carmichael commenting after the Bank’s announcement believes the $1.9 trillion stimulus package in the U.S. will bring an “historic jolt to the U.S. economy that will generate increased demand for Canadian exports.”

He added the Bank “mainly brushed aside worries about inflation which some investors and traders think will soon force central bankers to backtrack on their promises to keep interest rates low for another couple of years at least.”

He added that a continual run of strong numbers could force a tweak to the timing of higher interest rates.

Tomorrow we get job numbers for February and on March 17, inflation numbers for February and on March 31, GDP numbers for January which are said to be positive will be released. On April 21, the Bank will table its Monetary Policy Report which may provide some future thinking on rates and quantitative easing. When will the Bank begin to wind down QE?

The question for Finance Minister Freeland is how all of this will affect budget planning? Will the forecast of increased growth reduce the need for government stimulus spending in the range of $700 billion to $100 billion?

A budget might address these questions and more.

To Come

  • National day of remembrance for victims of COVID-19
  • PBO legislative costing report to be released
  • Deputy Governor of the Bank of Canada, Lawrence Schembri to deliver a speech on monetary policy
March 12
  • Job numbers for February to be released
March 15
  • Monthly survey of manufacturing for January to be released
March 16, 17
  • U.S. Fed meets
March 17
  • CPI numbers for February to be released

The Morning Brief returns on Wednesday, March 17.

– BC