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As expected, the Bank of Canada made no interest rate changes
and it is continuing to pull back its quantitative easing weekly
bond purchase program to $3 billion from a minimum of $4
billion.
The April Monetary Policy Report (MPR) baseline forecast is
stronger than January's estimates as Canada's real GDP rebounds
6.5% this year, advances 3.7% next year, and climbs 3.2% in
2023.
The annual 2021 inflation outlook was revised up to 2.3%,
followed by 1.9% in 2022 and 2.3% in 2023.
The Bank of Canada also raised its estimates for potential
output or moved the target that helps measure the output gap and
the amount of excess slack.
There was some change in the Bank's extraordinary forward
guidance given the upwardly revised outlooks. Excess slack in the
economy will persist until mid-2022. The Bank will look for a
broad-based recovery before hiking rates. The next policy
announcement is scheduled for 9 June.
Outlook
It was no surprise that the Bank raised the economic and
inflation outlooks. Global real GDP is much stronger than was laid
out in the January forecast, particularly in terms of a more solid
US growth projection, which is stronger than the April IHS Markit
US economic forecast. Plus, the domestic economy proved to be more
resilient than the Bank forecast during the pandemic's second wave.
Higher estimates of potential output are coming from stronger trend
labor productivity projections, with total output growth averaging
1.5% this year from a wide range of estimates, 1.4% next year, 2.0%
in 2023, and 2.2% in 2024. The Bank's real GDP projections of 7.0%
quarter on quarter at annual rates (q/q) in the first quarter and
3.5% q/q in the second quarter are similar to IHS Markit's April
forecast. The more contagious new variants and prolonged and
sometimes more severe lockdown measures, despite the increased
rollout of vaccines, suggest that the economy will slow in the
second quarter, highlighting the healthy dose of uncertainty
surrounding the outlook and potential output. It should be noted
that the Bank of Canada assumed about $85 billion of federal
government stimulus spending in the forecast, which was completed
before the release of the budget on 19 April. This has contributed
to the stronger growth forecasts compared with IHS Markit's
forecast.
Inflation concerns in the MPR are as expected, as temporarily
elevated price pressures play out in the near term.
The extraordinary forward guidance changed this month, but the
fundamentals remain, with the Bank keeping rates at the effective
lower bound until economic capacity is used up and the 2% inflation
target is sustainably achieved. New estimates pinpoint this
occurring during the second half of next year. This does not
necessarily mean that the Bank will begin raising interest rates at
this time. Bank of Canada Governor Tiff Macklem will not count the
chickens before they hatch, noting in the press conference that the
Bank is looking for a full recovery, especially when it comes to
pulling the plug on quantitative easing. And, just like previous
recoveries, the Bank will focus on labor market conditions before
it starts raising interest rates. During the global financial
crisis, the Bank was focused on weak youth labor force
participation rates. In the April MPR, the Bank rightly states its
concern for "low-wage workers, young people, and women. Although
recent job numbers have been encouraging, it may take a
considerable time for overall employment to recover." The timing of
these labor groups' recoveries may not go hand in hand with
inflation pressures hitting a sustainable 2% inflation target.
April's jobs data are likely to be downbeat given the latest round
of extended restrictions. As such, the timing of monetary policy
tightening is uncertain and could likely hold off until the first
half of 2023, which is currently built into the Canadian
macroeconomic forecast.
Posted 27 April 2021 by Arlene Kish, M.A., Director – Economics, IHS Markit
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May 06
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