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Bank of Canada holds fast on rates, bond buying; sees economy gathering steam – The Globe and Mail

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The Bank of Canada building in Ottawa.

Adrian Wyld/The Canadian Press

The Bank of Canada held fast on its ultralow interest rate and pace of government-bond buying on Wednesday, while acknowledging that the economy weathered the second wave of the pandemic better than expected and is beginning to gather steam.

The central bank kept its policy interest rate at 0.25 per cent, and reiterated that it does not expect to start raising rates until 2023. It also said that it would continue buying $4-billion worth of government of Canada bonds each week, giving few hints as to when it might begin to “taper” its quantitative easing program.

The key question heading into Wednesday was how the bank would navigate growing optimism in the wake of better-than-expected economic data in both Canada and the United States. Long-term government bond yields have spiked in recent weeks, with the market pricing in faster economic growth, higher inflation and rate hikes as early as next year.

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The bank acknowledged the changing outlook while maintaining a somewhat cautious tone because of continuing weakness in the labour market. Analysts suggested that the bank opted for a “do no harm” approach, postponing any meaningful revisions to its outlook and policy position until April 21, when it will publish a new economic forecast alongside its next rate decision.

“The economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures,” the bank said in Wednesday’s one-page statement. It noted that GDP growth in the fourth quarter of 2020 was 9.6 per cent on an annualized basis, twice what the bank had forecast in January, and that GDP is now expected to grow in the first quarter of 2021 rather than contract.

“Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected. Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment,” it said.

Bank of Canada’s heightened focus on labour slack may cool the heels of the bond market

BoC’s low-interest-rate policy could further heat housing market, experts say

At the same time, it noted that there is still considerable slack in the economy and uncertainty about the evolution of COVID-19. It said the labour market is “a long way from recovery,” noting that employment is still well below prepandemic levels, and that low-wage workers, young people and women have been hit the hardest.

“This [rate decision] is a placeholder between forecast revisions, and the next one is going to be quite material,” said Derek Holt, head of capital markets economics at the Bank of Nova Scotia, pointing to the April 21 rate decision.

“They have to pretty sharply raise and front load their growth forecasts, probably pull forward the output gap,” he said in an interview.

The solid economic data, combined with another round of fiscal stimulus in the U.S., has already begun fuelling expectations about inflation. In a speech on Tuesday, Royal Bank of Canada chief executive Dave McKay spoke of prices for inputs such as labour and commodities rising “earlier than later.”

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“We do see a challenge to the policy and therefore, central banks having to respond to this in 2022, the latter half of 2022, with rate increases. Versus where you might have thought – late 2023, even 2024 – six months ago,” Mr. McKay said.

For its part, the bank said the year-over-year rate of inflation will likely tick up in the coming months, as current prices for goods and services – most notably the price of oil – are compared with prices depressed at the outset of the pandemic. Although it reiterated its view that inflation will moderate in the second half of the year, as “excess capacity continues to exert downward pressure.” It noted that measures of core inflation currently range from 1.3 per cent to 2 per cent.

Economists were watching the rate decision for indications about when the bank might begin slowing its pace of government bond buying, which is being done to keep long-term interest rates down. The bank said nothing new on this front, repeating its January comment that the pace of bond buying will be adjusted as the bank’s governing council gains confidence in the strength of the recovery.

Scotiabank’s Mr. Holt said the bank missed an opportunity on Wednesday to announce changes to the quantitative easing program.

“The market was giving them a free pass, it had already adjusted to some tapering assumptions, so they could have snuck one in. And in this kind of an environment, you take every such opportunity that you can get, when the conditions are right for doing so,” he said.

Analysts remain split as to whether the bank is most likely to begin slowing its pace of bond buying in April or later in June. The bank said on Wednesday that it “will continue its QE program until the recovery is well underway.”

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Economy

Canada to go big on budget spending as pandemic lingers, election looms

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By Julie Gordon

OTTAWA (Reuters) – Canada‘s Liberal government will deliver on its promise to spend big when it presents its first budget in two years next week amid a fast-rising third wave of COVID-19 infections and ahead of an election expected in coming months.

Finance Minister Chrystia Freeland has pledged to do “whatever it takes” to support Canadians, and in November promised up to C$100 billion ($79.8 billion) in stimulus over three years to “jump-start” an economic recovery in what is likely to be a crucial year for her party.

Prime Minister Justin Trudeau’s Liberals depend on the support of at least one opposition group to pass laws, and senior party members have said an election is likely within months as it seeks a clear majority and a free hand to legislate.

Furthermore, by September, all Canadians who want to be vaccinated will be, Trudeau has said.

Freeland has said the pandemic created a “window” of opportunity for a national childcare plan, and that will be reflected in next Monday’s budget along with spending to accelerate Canada‘s shift toward a more sustainable economy.

“It will be a green and innovative recovery plan aimed at creating jobs,” said a government source who declined to comment on specific measures. The budget will aim to help those “who have suffered most” the effects of the pandemic, the source said.

Critics say the government would be better to hold off on blockbuster spending because the economy has shown it is poised to bounce back, and to prevent the country from racking up too much debt.

“Clearly a garden-variety stimulus package is the last thing we need. This is pile-on debt,” said Don Drummond, an economist at Ontario’s Queen’s University.

“The risk is that at some point interest rates are going to go up and we’re going to be in trouble,” he said, pointing to the mid-1990s when Canada‘s debt-to-GDP ratio skyrocketed, leading to rating agency downgrades and years of austerity.

The Bank of Canada cut its benchmark interest rate to 0.25% to counter the economic fallout of the COVID-19 crisis and has said rates will not rise until labor market slack is absorbed, currently forecast for into 2023. That may change when it releases new projections on April 21.

EXPANDING ECONOMY

More than 3 million Canadians lost their jobs to the pandemic. As of March, before a third wave forced new lockdowns, only 296,000 remained unemployed because of COVID.

Despite still-high unemployment levels in hard-hit service sectors, the economy has expanded for nine straight months even as provinces have adjusted health restrictions to counter waves of infections.

“Once we see sustained reopening, we do think that the recovery will have quite a bit of momentum on its own,” said Josh Nye, a senior economist at RBC Economics.

“We think Canada‘s economy will be operating pretty close to full capacity by this time next year,” he said.

Economists surveyed by Reuters expect Freeland to project a deficit in the range of C$133 billion to C$175 billion for fiscal 2021/22, up from the C$121.2 billion ($96.7 billion)

deficit forecast in November. https://tmsnrt.rs/3wSJPcm

The deficit for fiscal 2020/21 ended in March is forecast by the government to top a historic C$381.6 billion ($304.5 billion).

Canada announced on Monday a C$5.9 billion ($4.7 billion) aid package for the country’s largest airline carrier, Air Canada, and said talks were ongoing with No. 2 carrier WestJet Airlines Ltd and others.

 

(Reporting by Julie Gordon in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Steve Scherer and Peter Cooney)

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Economy

CANADA STOCKS – TSX ends flat at 19,228.03

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* The Toronto Stock Exchange’s TSX falls 0.00 percent to 19,228.03

* Leading the index were Corus Entertainment Inc <CJRb.TO​>, up 7.0%, Methanex Corp​, up 6.4%, and Canaccord Genuity Group Inc​, higher by 5.5%.

* Lagging shares were Denison Mines Corp​​, down 7.0%, Trillium Therapeutics Inc​, down 7.0%, and Nexgen Energy Ltd​, lower by 5.7%.

* On the TSX 93 issues rose and 128 fell as a 0.7-to-1 ratio favored decliners. There were 26 new highs and no new lows, with total volume of 183.7 million shares.

* The most heavily traded shares by volume were Toronto-dominion Bank, Nutrien Ltd and Organigram Holdings Inc.

* The TSX’s energy group fell 1.61 points, or 1.4%, while the financials sector climbed 0.67 points, or 0.2%.

* West Texas Intermediate crude futures fell 0.44%, or $0.26, to $59.34 a barrel. Brent crude  fell 0.24%, or $0.15, to $63.05 [O/R]

* The TSX is up 10.3% for the year.

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Economy

Canadian dollar outshines G10 peers, boosted by jobs surge

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar advanced against its broadly stronger U.S. counterpart on Friday as data showing the economy added far more jobs than expected in March offset lower oil prices, with the loonie also gaining for the week.

Canada added 303,100 jobs in March, triple analyst expectations, driven by the recovery across sectors hit by shutdowns in December and January to curb the new coronavirus.

“The Canadian economy keeps beating expectations,” said Michael Goshko, corporate risk manager at Western Union Business Solutions. “It seems like the economy is adapting to these closures and restrictions.”

Stronger-than-expected economic growth could pull forward the timing of the first interest rate hike by the Bank of Canada, Goshko said.

The central bank has signaled that its benchmark rate will stay at a record low of 0.25% until 2023. It is due to update its economic forecasts on April 21, when some analysts expect it to cut bond purchases.

The Canadian dollar was trading 0.3% higher at 1.2530 to the greenback, or 79.81 U.S. cents, the biggest gain among G10 currencies. For the week, it was also up 0.3%.

Still, speculators have cut their bullish bets on the Canadian dollar to the lowest since December, data from the U.S. Commodity Futures Trading Commission showed. As of April 6, net long positions had fallen to 2,690 contracts from 6,518 in the prior week.

The price of oil, one of Canada‘s major exports, was pressured by rising supplies from major producers. U.S. crude prices settled 0.5% lower at $59.32 a barrel, while the U.S. dollar gained ground against a basket of major currencies, supported by higher U.S. Treasury yields.

Canadian government bond yields also climbed and the curve steepened, with the 10-year up 4.1 basis points at 1.502%.

 

(Reporting by Fergal Smith; Editing by Andrea Ricci)

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