The Bank of Canada provided a rosy revision to its economic outlook Wednesday but kept its key rate at 0.25% in a sign that it won’t count its chickens before they hatch.
The improving conditions are why the bank also said Wednesday it will ease off federal government bond purchases that form part of its quantitative-easing program designed to aid the economy during Covid-19.
And it pulled forward its expectations for when the economy will be strong enough to handle a rise in rates. The bank now sees that an inflation back at its 2% target later in 2022, rather than some time in 2023.
But first the economy faces a test in the form of the deadly third wave of the Covid-19 pandemic, which the bank said threatens the pace of the recovery and growth in the jobs market particularly highly affected sectors.
Governor Tiff Macklem said much will rest on whether households and businesses show the same resiliency as they did during the second wave of the pandemic at the start the year.
“Vaccines are rolling out, and there are brighter, brighter days ahead and reflecting that we have revised up our outlook,” Macklem said during a late-morning press conference.
“But … it is still going to take some time to get to a complete recovery. This third wave is a setback. It is straining health-care systems in part of the country.”
He added that the hardest-hit sectors of the economy will be most affected.
The effect will be sharpest on high-contact sectors like restaurants, the bank said, adding that the ripples will prolong the unevenness in the labour market’s recovery from historic job losses one year ago.
The bank said it expects tighter restrictions during this third wave of Covid-19 to lead to job losses, mostly in low-wage and part-time work, as part of a material, but temporary effect on the economy.
It will take time for jobless Canadians and those looking to join the labour force to find work, which the bank said may lead some households to hold on to the savings accumulated over the past year as a safety net instead of spending them all at once.
On average, Canadians have accumulated $5,800 in extra savings through the pandemic.
“We really need to be careful about averages when it comes to this recession because it has been so uneven,” Finance Minister Chrystia Freeland said Wednesday at an event hosted by the Canadian Chamber of Commerce.
Freeland said she wanted employment and the economy’s capacity back to, and then above, pre-crisis levels as fast as possible.
Based on employment figures for March, the central bank estimated that about 300,000 more people would need to be hired to get back to pre-pandemic levels, or 475,000 when factoring in population growth.
Macklem said the bank would keep a close eye on the labour market among a range of indicators before deciding when the time was right to raise rates.
“You’re seeing a recession and recovery like we’ve never experienced before,” Macklem said, adding later: “We’re looking for a complete recovery, and that’s going to take some time.”
The bank’s prediction for economic growth this year of 6.5%, fuelled by consumer spending, is 2.5 percentage points higher than its last quarterly outlook and above the 5.8% predicted in Monday’s federal budget.
The central bank expects economic growth to moderate after that, hitting 3.7% next year and 3.25% the year after. The federal budget forecasted 4% next year, and 2.1% in 2023.
Freeland said she was confident in the GDP projections based on a survey of private sector economists. She called the figures prudent and reasonable.
The Bank of Canada’s forecast doesn’t take into effect the full suite of stimulus outlined in the federal budget. It baked in $85 billion in new spending, rather than the $101 billion over three years the Liberals promised in Monday’s budget.
Macklem said the stimulus from federal and provincial governments would help drive growth in the coming years, but not have an impact on inflation.
Inflation is expected to hover at the top range of the bank’s comfort zone, but only because prices now are being compared with the weak levels seen one year ago at the onset of the pandemic.
Statistics Canada said Wednesday the consumer price index in March was up 2.2% compared with a year ago, noting the year-over-year impact that should continue for the next few months.
Macklem also expressed concern about the heated housing market. He said the bank’s worry is that people decide to buy on speculation that prices will rise indefinitely and that they will overstretch themselves financially.
He welcomed a proposal by a federal bank regulator to tighten its stress test for uninsured mortgages. Macklem also said a federal budget pledge to place a tax on vacant home owned by non-Canadian residents should temper speculation and add supply so it can begin catching up with demand.
With files from Lee Berthiaume