The Morning Brief – 10.29.20

By Bruce Carson


Bank of Canada will continue with record low interest rates until 2023

The Bank’s monetary policy provides some measure of certainty for Canadians

Will fiscal policy follow and provide an anchor for government spending?

An Anniversary

This is a great day in the life of The Morning Brief as today it begins its 10th year of publication. It has survived two federal elections and by next week, two presidential elections. It is fun putting this together, with the constant fear of running out of material to write about; something which to date has not materialized. Thank you to readers for comments and suggestions through the years.


Bank of Canada

The release from the Bank of Canada yesterday stated that interest rates would remain at 0.25%. Quantitative Easing, bond buying by the Bank will continue but shift to longer term bonds and over time the Bank will reduce its weekly purchase from $5 billion to $4 billion.

On the state of the economy, the Bank noted that the rapid expansion that occurred when the economy opened up before summer has given way to slower growth. This has occurred in many countries which are now back relying on policy program support.

The U.S. saw growth rebound quickly, but now appears to be slowing as virus cases mount once again. Ironically, China where the pandemic began is back to pre-pandemic growth.

Global GDP is projected to contract by 4% in 2020 before growing by 4.5% in 2021-22.

With regard to commodities, those in the non-energy category have more than fully recovered while oil prices remain 30% below pre-pandemic levels.

In Canada, the rebound in summer in employment and GDP was stronger than expected but it now is transitioning to a more moderate recuperative phase. The Bank sees Q4 growth slowing substantially due to rising COVID-19 case numbers.

The economy declined 5.5% in 2020, but it expects the Canadian economy to grow by almost 4% on average in 2021 and 2022. Growth was described as “choppy” as consumer demand is not steady but affected by the virus and its impact on consumer and business confidence.

To deal with this uncertainty and choppiness, governments at all levels have extended and modified business and income support programs. The Bank has revised downward its estimate of Canada’s potential growth over the projected horizon.

With regard to inflation, it stood at 0.5% in September and the Bank expects it not to return to being within the band of 1%-3% until early 2021, largely due to the decline in oil prices.

The Governing Council of the Bank has concluded that “the economy as it recuperates will require extraordinary monetary policy supports.”

The Bank will hold rates where they are until economic slack is absorbed and 2% inflation target is substantially achieved which the Bank sees as not occurring until 2023. Also QE will continue until recovery is well underway.

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

In its Monetary Policy Report the Bank states that its economic assumptions are based on two matters. First, the Bank assumes that extensive lockdown measures will not be reintroduced. Second, vaccines and effective treatments will be widely available by mid-2022.

The Bank notes that there are still 720,000 Canadians still out of work as a result of the pandemic. Hardest hit sectors are accommodation, food services, recreation and travel which have elevated numbers of unemployed. Low wage workers continue to be disproportionately affected. The issue as set out by the Bank is that “long breaks in employment have the potential for long term impacts on the income prospects of vulnerable groups.”

In the press conference that followed release of the Monetary Policy Report, Governor Macklem stated that it will take some time for the economy to recover and the Bank will be supportive throughout this period.

Growth in Q4 will be just barely positive and will not achieve potential until 2023 with inflation staying below 2% during this period.

It was during the Q and A session that Governor Macklem explained why the Bank went to great lengths to set out forward guidance. He said the Bank was trying to deal with uncertainty in the pandemic. The recuperation period will take time and the Bank believes it would be helpful for Canadians to know that it will take longer and that monetary policy can support the economy through to 2023 and will provide updates of the projections contained in the monetary reports.

In response to a question by David Akin, Macklem said that this is going to be a “long slog,” but rates will be kept where they are now through 2023 to provide certainty for households and businesses. Low rates will help in the housing sector and for those households planning major purchases.

On negative interest rates, Macklem was quite adamant that they were not discussed, but still in the toolkit. There would have to be a “really high bar” for them to be used.

The Governor was asked about Pierre Poilievre’s warning that the Bank of Canada not become an ATM for the Trudeau government’s policy pursuits outside of dealing with the pandemic. Macklem said the focus of the Bank was on achieving its inflation target.

So the Bank has basically locked down monetary policy until at least mid-2023. However, we are still at sea on fiscal policy without an anchor and according to the prime minister speaking on Monday to the Canadian Chamber of Commerce, the Fall Economic Update will not contain a fiscal anchor.

Trudeau said the pandemic has been too disruptive for his team to commit to a strict budgetary goal in the fiscal update. He stated “it was premature to be locking things down.”

Former Parliamentary Budget Officer Kevin Page commenting on the statements by Trudeau said “there’s a cost to having effectively no fiscal plan…and right now it’s fair to say we have no fiscal strategy.” He added “this is about where the government’s rudder is, where is the policy strategy that guides us through the pandemic and post COVID-19 recovery? We are missing that.”

The Fall Economic Update needs to provide an anchor or “rudder” that Page describes, to ensure guardrails are in place for fiscal policy to complement the work done by the Bank on monetary policy.

To Come

October 30
  • GDP numbers for August to be released
November 3
  • U.S. presidential election
November 5
  • Ontario budget to be released
November 6
  • Job numbers for October to be released

The Morning Brief will return on Wednesday, November 4, with commentary on the results of the U.S. election, assuming results are available.

– BC