A reassurance from the Bank of Canada that “interest rates will be low for a long time,” as the bank’s governor, Tiff Macklem, told us last year, appears to have been revised.
New signs of a strong recovery — including the bank’s prediction of a stunning global growth rate of nearly seven per cent this year — plus indications that the underlying foundation of the Canadian economy has not suffered serious damage from the COVID-19 pandemic, mean the central bank is scaling back on monetary stimulus.
Not only did Macklem reveal that he is slowing the rate of bond purchases, but rock-bottom interest rates — what the bank calls “the effective lower bound” — are forecast to come to an end sooner than expected.
“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the two per cent inflation target is sustainably achieved,” the Bank of Canada said in its Wednesday statement. “Based on the bank’s latest projection, this is now expected to happen some time in the second half of 2022.
Ending low-rate commitment
Scaling back bond purchases — this time from $4 billion to $3 billion a month — tends to affect longer-term rates, while a hike in the Bank of Canada’s overnight rate affects variable mortgages and things like lines of credit. While the bank did not officially announce an increase in so many words, ending a commitment to hold rates down was seen by economists and financial reporters as exactly that.
“Can someone please ask Governor Macklem if he means to expressly state they expect a 2022 rate hike with this statement?” tweeted Frances Donald, global chief economist at Manulife Investment Management, “because that’s a reasonable interpretation, but I can’t believe it’s the intention.”
Asked by reporters more than once at Wednesday’s news conference to clarify the statement, Macklem did not withdraw it, although he underlined the uncertainty and said the bank would be guided by a broad analysis of economic conditions, not by any predetermined date.
While economists and borrowers may have been surprised by the possibility of a Bank of Canada rate hike as soon as 2022, clearly Macklem saw the prospect of reduced stimulus as a reason for celebration, not anxiety, because it was just one more indicator that the economy was on the mend.
Video: Bank of Canada optimistic about post-pandemic recovery (cbc.ca)
“There are brighter days ahead,” Macklem told reporters at Wednesday’s news conference, projecting 6.75 per cent growth globally this year and 6.5 per cent in Canada. “Canadians and Canadian businesses have been impressively resilient to the pandemic.”
An economic growth rate of nearly seven per cent is seen as unusually high for an advanced economy and will reflect roaring consumer demand as restrictions lift this autumn, plus a new wave of fiscal stimulus from Ottawa, the provinces and from south of the border.
Macklem said there remained many uncertainties as he and the bank’s Governing Council, which advises him, struggle to understand a recession unlike any other they have seen.
They have been fooled before. Last year, the central bank warned of a deep recession that would lead to “scarring” — in other words, long-term damage to the underlying economy.
Growth despite lockdown
But that’s not the way things turned out, Macklem said. Instead, an expansion into the digital space — the growing use of computers and software in new areas of the economy — means economic growth continued, even as many traditional face-to-face businesses were in lockdown due to the pandemic.
Following the 2008 recession, many government handouts and much stimulus went directly to business, but this time fiscal spending on things such as child care and further digital expansion will actually boost productivity, working its way up through the wider economy.
Repeatedly asked about Canada’s overheated real estate market, Macklem warned once again that buyers should not count on the idea that prices will continue to go up at current extraordinary rates.
The central banker suggested that new higher stress tests imposed two weeks ago, as well as a new federal tax on vacant properties, will slow the market. Others have suggested that rising interest rates would have an even stronger impact on many Canadians who have taken on mortgages and other loans that are very high compared with their incomes.
One of the indicators Macklem said the central bank would use to finally decide whether to cut back on monetary stimulus was whether people at the lowest end of the income ladder had been able to find work in a divided, K-shaped, recovery.
“There’s a chart in the Monetary Policy Report that shows low-wage workers … are about 20 per cent below their pre-pandemic levels,” he said. The chart shows that higher-wage workers have already exceeded pre-pandemic employment.
As with any forecast, there are many unknowns. Will the economy triumph over the third wave of the pandemic as well as it did over the second? Will vaccine take-up allow us to reach herd immunity?
“We’re looking for a complete recovery,” Macklem said. “We’re not going to count our chickens before they hatch.”
Follow Don Pittis on Twitter @don_pittis