Interest rates will stay low as Canada faces ‘long climb out’ of COVID-19 hole, central bank says

Canada’s central bank opted to keep its benchmark interest rate right where it was on Wednesday, at 0.25 per cent.

It’s the first rate decision under the stewardship of Tiff Macklem, who took over as governor of the Bank of Canada last month after Stephen Poloz’s seven-year term as governor ended.

The final months of Poloz’s tenure featured a sudden and dramatic series of rate cuts as central banks around the world moved in unison to slash lending rates to near zero to encourage borrowing and investment to stimulate the economy walloped by the COVID-19 pandemic.

The bank’s rate decision suggests there are no short term plans to deviate from that strategy any time soon.

“It’s going to be a long climb out,” Macklem said at a press conference following the announcement on Wednesday. “We are being unusually clear that interest rates are going to be unusually low for a long time.”

Move was expected

The decision was in line with expectations of economists who monitor the central bank polled by Bloomberg. The bank’s next decision is scheduled for Sept. 9 and no change is expected at that meeting either.

In addition to the interest rate decision, the bank also released its quarterly Monetary Policy Report, which outlines the bank’s outlook for the economy.

The bank calculates that lockdowns and other physical distancing efforts across Canada in the April-to-June period shaved off about 15 per cent of Canada’s GDP.

That makes for the worst quarter for Canada’s economy since the Great Depression, but it’s actually better than the worst-case scenario the bank was tracking when the pandemic began.

“There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back in employment and output,” the bank said.

Economy won’t get back to normal until 2022

For 2020 as a whole, the central bank is now expecting Canada’s economy to shrink by 7.8 per cent but then rebound by 5.1 per cent in 2021 and 3.7 per cent in 2022.

While that’s better than it could have been, it does mean the central bank doesn’t think the economy will get anywhere close to back to normal for another two years.

And that outlook hinges on one rather uncertain development: It assumes Canada’s economy will be spared a second wave of COVID-19.

“We have assumed there is no widespread second wave and hence there’s no widespread second lockdown,” Macklem said. “But we do anticipate there will be localized flare ups and localized restrictions.”

Sherry Cooper, chief economist of Dominion Lending Centres, says that view may prove to be overly optimistic.

“The last few weeks have shown that numbers can bounce back even faster than the numbers went down and a second wave is a very real possibility in the fall,” Cooper said.

In addition to signaling it has no plans to change rates any time soon, the bank also said it plans to continue its bond buying programs, to support credit markets.

Economist Brian DePratto of TD Bank said there were “no surprises” in the bank’s decision.

“With uncertainty still extremely elevated, the Bank of Canada is not taking any chances, maintaining stimulus, and reminding us again that they can and will do more to support the economy if needed.”

CBC