As expected, the Bank of Canada left its target rate at 0.25 percent at today's Governing Council meeting. It stated that it will not consider tightening policy settings until it sees CPI hitting the 2 percent target on a sustained basis, something it does not expect to happen until 2023.
Alongside the policy decision, the Bank also published its updated Monetary Policy Report (MPR). The last such report appeared in July, when Provinces were still in the midst of lifting the lockdown measures that had been imposed in the spring, and reflected extreme uncertainty over the economic impact of the pandemic. Today's report shows rather more confidence in the outlook for the economy, allowing the Bank to resume its normal practice of publishing forecasts for both growth and inflation.
The Bank expects that for 2020 as a whole, real GDP will show a 5.7 percent decline, even as most data show significant improvement from the record declines posted in March and April. The strongest phase of the recovery is already over, giving way to less impressive gains that will see GDP rising about 4 percent in both 2012 and 2022, which the Bank characterizes as a "recuperation phase". This implies that real GDP will not return to its pre-pandemic level unto the summer of 2023.
Tabling the MPR, Governor Tiff Macklem was at pains to emphasize that this forecast is heavily dependent on how the COVID pandemic plays out. The Bank assumes there will be no return to the blanket lockdowns seen across the country in the second quarter of this year. Given the rise in cases in recent weeks in the four most populous Provinces (Quebec, Ontario, Alberta and BC), it is far from certain that this assumption will hold. Even if blanket lockdowns are avoided, the Bank accepts that stringent local measures will be needed from time to time, so the recuperation phase will not be smooth.
The slack created in the economy by the coronavirus is illustrated by the fact that the level of employment across Canada is still 700,000 below its pre-pandemic level. That slack means that inflationary pressures are not expected to surface any time soon. The latest CPI reading was 0.5 percent and the Bank expects it to stay below the 1-3 percent target range until early 2021. After that, CPI is expected to move gradually higher, but the base case forecast sees it remaining below the 2 percent mid-point of the range throughout the 2-year forecast horizon. On that basis, the Bank is not contemplating any tightening of its monetary settings until 2023.
In addition to maintaining its ultra-low rate settings, the Bank also announced a recalibration of its quantitative easing program. It will gradually reduce the overall scale of the program, while shifting the emphasis towards purchasing long term bonds, on the grounds that this "focuses more directly on the borrowing rates that are most relevant for households and businesses". This is perhaps a little surprising: Canada's housing market is once again attracting unwanted attention as one of the most overvalued and bubble-prone in the world, and the promise of a sustained period of ultra-low mortgage rates can only exacerbate that situation.
Even if you are not an aficionado of modern monetary theory, it is legitimate to wonder how much all of this matters. Governor Macklem characterized the Bank's stance as "monetary policy stimulus", but experience in Japan and elsewhere casts doubt on the ability of ultra-easy policy to accomplish any such thing. The Bank is right to ensure that its policies do not get in the way, but producing an actual recovery in growth and inflation is likely to depend much more on fiscal policy.
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