Bank of Canada Governor Tiff Macklem holds a press conference at the Bank of Canada amid the COVID-19 pandemic in Ottawa on Monday, June 22, 2020. The Bank of Canada updated its outlook for the Canadian economy today as part of Macklem's first interest rate announcement since becoming governor. (Sean Kilpatrick/THE CANADIAN PRESS)

Interest rates are going to be low ‘for a very long time,’ says central bank

Canada’s central bank decided to keep its benchmark interest rate at 0.25 per cent on Wednesday and continue with its monetary policy of buying up billions of dollars in government bonds to increase the money supply and encourage lending and investment in the pandemic-ravaged economy.

It was 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 tenure ended.

“Our message to Canadians is that our interest rates are very low and they’re going to be there for a very long time,” Macklem said at a press conference in Ottawa presenting the rate decision and the accompanying Monetary Policy Report (MPR).

The COVID-19 pandemic has caused an unprecedented fall in economic activity in Canada, and the recovery will require considerable monetary policy support, Macklem said.

The central bank will continue to provide monetary stimulus for an extended period to support the recovery and return inflation to its 2 per cent target, he added.

‘A human tragedy and an economic calamity’

“The pandemic is a human tragedy and an economic calamity that is taking lives and livelihoods,” Macklem said. “In the first half of the year, the global economy faced its biggest decline since the Great Depression.”

As measures to contain the virus are lifted in many places, economic activity is starting to pick up. However, as the example of the United States demonstrates, there can be flare-ups of the virus, leading to new lockdowns that will impede the recovery, he said.

“We are facing many uncertainties, the biggest of which is the unknowable course of the virus itself,” Macklem said. “As a result, we cannot forecast with the usual degree of accuracy in our economic projections.”

Instead the central bank has decided to present a “central economic scenario.”

Under this scenario the central bank assumes that the pandemic will have largely run its course by the middle of 2022, because either a vaccine or an effective treatment is widely available by then, Macklem said.

The Canadian economy is expected to shrink by almost 8 per cent this year, then grow by just over 5 per cent in 2021 and almost 4 percent in 2022, he said.

Recent monthly data—particularly on employment, motor vehicle sales and housing—suggest that the Canadian economy hit bottom in April, Macklem said. Job growth resumed in May and accelerated in June.

Central bank economists estimate that the Canadian economy contracted by about 15 per cent in the first half of this year, Macklem said.

“As deep as this is, it suggests the economy has avoided the most dire scenarios we laid out in the April MPR,” Macklem said.

A bumpy road to economic recovery

In the third quarter, the bank expects to continue to see a strong rebound in jobs and output, he added.

However, the exceptionally strong near-term growth of the reopening phase is likely to give way to a slower and bumpier recuperation phase, Macklem said

As a result, it will take a long time for economic activity to get back even to the level where it was at the end of 2019, before the pandemic struck, he said.

There are many reasons why the recuperation phase may be protracted.

“Some businesses will close, while others will be unable to return to pre-pandemic activities,” Macklem said.

“Business and consumer confidence have been shaken, and consumers are likely to remain cautious with their spending. And many people may find it hard to return to work particularly if schools and child-care facilities cannot fully reopen.”

The bank’s next decision is scheduled for Sept. 9 and no change is expected at that meeting either.

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