Lhe Canadian economy grew 5.6% from January to March, said the central bank, which had instead predicted in April that its growth would be around 7.0%. In addition, new lockdowns associated with the third wave of the pandemic have tempered economic activity.
This backdrop is enough for Bank of Montreal’s Canadian rate director Benjamin Reitzes to warn that second-quarter growth data may also be below expectations.
Still, central bank policymakers looked beyond those hurdles on Wednesday, and say they expect the Canadian economy to rebound strongly from this summer, boosted by consumer spending, as the pace immunizations accelerate and provincial governments ease economic restrictions.
“They’re still not showing off the third wave and their (bad forecast) for the first quarter,” Reitzes said. “Their optimism resists all of this.”
The central bank has kept its key interest rate at 0.25%, where it has been since the start of the pandemic last year. It has already indicated that it will not increase it until the economy recovers – that is, when excess capacity is absorbed and the inflation target of 2.0% is reached on a sustainable basis.
A recovery in the labor market also remains a key factor in future decisions by the Bank of Canada, said Sri Thanabalasingam, senior economist at TD Bank. If employment rebounds quickly this summer, that could force the bank to raise rates sooner, he explained.
The bank also said it would stay the course on its federal bond purchases for now, after cutting them a few weeks ago, citing improving economic conditions. These bond purchases help to lower the rates charged on mortgages and business loans.
The bank’s board of directors said annual inflation is expected to hover around 3.0% over the summer, due to rising gasoline prices and the comparison between current prices and low prices from last year, during the pandemic.
Inflation is expected to ease later this year, the bank continued, to move closer to its 2.0% target.
A possible electoral campaign
Moshe Lander, senior lecturer in economics at Concordia University, pointed out that the Bank of Canada could suspend any rate changes so as not to stifle a nascent rebound.
But the longer she delays doing anything, the closer she will be to fall and a possible federal election campaign. However, the bank traditionally avoids any rate change during an election period, to prevent its actions from becoming politicized and threatening its independence.
“Unless there is a clear economic signal that interest rates need to be raised and it needs to be done now, I think the Bank of Canada will probably try to pass its turn,” said Mr. Lander.
How and when the central bank chooses to end its monetary stimulus will have implications for budget policymakers, said Robert Asselin, Senior Vice President of Public Policy at the Business Council of Canada.
Federal politicians, he said, could find themselves forced to respond to inflation if voters raise concerns before or during a campaign, or if markets become more volatile. And when the bank begins to raise rates, the federal government will have to consider whether it should keep the stimulus spending taps open, Asselin said.
“It will be difficult for policymakers to justify a very open and lax fiscal policy, if the monetary policy (of the Bank of Canada) essentially says (…) that we have recovered from the crisis,” Mr. Asselin, a former budget adviser to the federal Liberals.
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