The Bank of Canada has pledged to keep its key interest rate near zero throughout the economy’s recovery from the COVID-19 pandemic, which it said will be protracted and uneven.
In its interest-rate decision on Wednesday, the central bank held its key rate steady at 0.25 per cent, reiterating that it considers this effectively to be the bottom. But it added a promise to keep it there “until economic slack is absorbed” so that inflation can be sustainably maintained at 2 per cent, the target the bank uses to guide its interest-rate policy.
“We recognize that households and businesses are facing an unusual amount of uncertainty,” Bank of Canada Governor Tiff Macklem said in a news conference. “Against that background, we are being unusually clear that interest rates are going to be low for a long time.”
The bank also reaffirmed that it would continue its other major approach to economic stimulus – its minimum weekly purchase of $5-billion worth of government of Canada bonds – “until the recovery is well under way.”
The explicit commitment on rates – a policy strategy known in central banking as “forward guidance” – came as the bank released its first economic forecasts since the COVID-19 crisis began. It estimated that the economy shrank by 15 per cent in the first half of the year, and projected that even with the sharp postlockdown rebound, the economy will decline by 7.8 per cent for 2020 as a whole.
“Our message is that it’s going to be a long climb back, and the Bank of Canada is going to be there through the full length of the recovery, until economic slack is absorbed,” Mr. Macklem said.
People who have a mortgage or are considering a major purchase, or businesses thinking about making an investment can be confident interest rates will be low for a long time, he said. “Low interest rates make spending and investment more affordable, and spending and investment will support the recovery.”
Arlene Kish, director of Canadian economics at research firm IHS Markit, said in a commentary that Mr. Macklem’s forward guidance “points to interest rates remaining unchanged until 2023.”
The news conference followed the publication of the bank’s quarterly Monetary Policy Report (MPR) – Mr. Macklem’s first as head of the bank. He succeeded Stephen Poloz just six weeks ago. The bank usually updates its economic forecasts in each MPR, but Mr. Poloz opted against specific projections in April, citing extreme uncertainty at the height of the crisis.
In the report, the bank estimated that real gross domestic product plunged 13.1 per cent in the second quarter, on top of a 2.1-per-cent contraction in the first quarter. It expects a bounce-back of 7.1 per cent in the third quarter, reflecting the rapid return of activity as more containment restrictions are lifted. The forecast assumes that “about 40 per cent” of the drop in output in the first half of the year will be recouped in the third quarter.
However, it cautioned that it expects this initial rebound to be followed “by a more prolonged recuperation phase, which will be uneven across regions and sectors.” It forecast that the economy would grow by 5.1 per cent in 2021 and 3.7 per cent in 2022 as the impact of the crisis dissipates – but it doesn’t see economic output returning to prepandemic levels until well into 2022.
The bank called its new outlook a “central scenario,” rather than a projection, emphasizing the continued uncertainty surrounding the numbers. The central scenario assumes no widespread second wave of COVID-19 in Canada or globally, and that the pandemic will have run its course by mid-2022.
“There are a multitude of scenarios both stronger and weaker than the central one presented here,” the bank said. Yet it cautioned that, over all, the bigger risks in the alternative scenarios appear to be an even weaker recovery, largely because of the potential for a second wave of the virus.
It estimated that the inflation rate – a key measure for the bank – fell to -0.1 per cent in the second quarter. The bank forecast that even as the economy reopens, inflation would be a thin 0.4 per cent in the third quarter, and just 0.6 per cent for the year as a whole, before picking up modestly to 1.2 per cent in 2021 and 1.7 per cent in 2022.
“The dramatic decline in [energy] prices in March and April will hold inflation down until early 2021. After that, the inflation outlook depends primarily on the speed and strength at which demand and supply recover,” the bank said. “Firms report that capacity could return quickly as the economy reopens and containment measures are lifted. They expect the recovery in demand to be more muted, especially in the services and energy sectors.”
In his short time on the job, Mr. Macklem has generally struck a more cautious tone than his predecessor Mr. Poloz, who was relatively optimistic about the potential for the economy to recover. Wednesday’s rate-decision statement, Monetary Policy Report and news conference reflected that subtle shift under the new leader, although the bank broadly remained consistent with the crisis-fighting policy stand Mr. Poloz put in place in his final months in office, which included deep rate cuts and the introduction of large-scale bond purchases.
But Charles St-Arnaud, chief economist at Alberta Central, the province’s credit-union association, said Mr. Macklem’s call for Canadians to rely on a long period of low rates to finance consumption seemed at odds with the bank’s long-standing concerns about elevated consumer debt.
“I find it interesting that missing from that statement is the risk of pushing already extremely leveraged households and businesses to even more extreme levels,” he said. “It feels a bit like the BoC is somewhat contradicting itself.”
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Through late summer and early fall, Tim Ball spent as much time as possible underwater in his dive gear, scouring the seabed off the Burin Peninsula for scallops.
It’s an ocean-to-table operation that sees his hand-harvested scallops quickly making their way to dinner plates in the downtown of St. John’s.
“I try to keep it all local,” said Ball about his business philosophy.
With a provincial economy that’s in dire straits and in need of reversing its course, Ball thinks every little bit can help— especially if the focus is keeping as many of those little bits as possible in the province.
For Ball, that means, among other things, using locally made bags and boxes for packing his scallops and using a Burin Peninsula cab company for sending his catch into St. John’s.
“Because this is a primary industry … we are in, and we are getting the actual resources from the bottom, this is creating new money for the economy,” Ball said. “If the money is staying in Newfoundland, then great.”
Terre Restaurant in St. John’s is one of the destinations for Ball’s scallops. Before the season ended last month they could be found listed on the menu as “Seared Diver Scallops.”
“They’re amazing,” said head chef Matthew Swift.
“Anywhere else in the world … the idea of marketing day boat scallops is sort of a pipe dream. If I were to tell friends in other places that Tim gets out of the water, and I get the scallops in as long as it takes to drive in from Burin? It’s insane,” he said.
On top of the quality, it’s Ball’s business recipe that also interests Swift.
“Just in terms of having a diverse and smaller economy, where we can support people on a more individual level,” he said.
This way of thinking is something that also strikes a chord with John Schouten — Memorial University’s Canada Research Chair in Social Enterprise.
Schouten says Ball’s operation means more than just local spending on his supply chain. There’s also a spillover effect which would also see Ball spend money at local businesses in and around Garnish, where he fishes from.
“So every hundred dollars that passes from me, to you, to somebody else here locally, that $100 is working the whole time in our favour here in the province,” said Schouten in an interview last month.
Patch the bucket
It may be a small example, but there’s a bigger lesson in it for the provincial government, said Schouten. He thinks the government should treat the economy like a leaky bucket, where money comes in and goes out.
“If the government could, using that metaphor, start patching the bucket to keep the money in the province longer, working harder for local businesses, local people, people who are making a living wage — that would do wonders for the stability of the economy here,” he said.
Speaking of helping the economy, Ball thinks what he’s doing is scalable. In addition to scallops, Ball also hand harvests sea urchin, but he thinks there’s more that can be harvested as well — including kelp, sea cucumbers and periwinkles.
For that to happen, there would have to be consistent licensing periods from the federal government and more divers with commercial dive training.
Eventually Ball would like to see a special school that trains up to a dozen divers a year for this type of work.
If a community had a handful of divers, Ball said, the economic spin-off is easy to see — you need people shucking scallops and spotting the divers, gear needs repairing, supplies need to be bought.
“I think it’s just a win-win situation for small communities,” he said. “It could be a good economic boon.”
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