The Bank of Canada is keeping interest rates at 0.25 per cent, and says the country’s economy will grow more slowly this year than it first expected.
The central bank now expects gross domestic product to increase by about six per cent in 2021, down from a forecast in April of 6.5 per cent. The projection for next year has been revised to 4.1 per cent growth — up from roughly three per cent — while 2023 remains unchanged at over three per cent.
Bank of Canada Governor Tiff Macklem says consumer spending is expected to lead the recovery, with some sectors, such as retail and restaurants, already enjoying a rebound. Other sectors, such as international travel, will take longer.
“The reopening of the economy, and the strong progress on vaccinations, have given us reason to be more optimistic about the direction of the economy,” Macklem said. “But we’re not there yet, and we’re mindful that the process is likely to be bumpy, and some scars will remain.”
Macklem said inflation will likely remain at or above three per cent for the remainder of the year due to temporary setbacks caused by the pandemic. These include gas prices that are higher than before the pandemic, shipping bottlenecks, and supply shortages.
Once these setbacks lessen by later in the year, inflation is expected to be about two per cent in 2022, before increasing again by more than two per cent in 2023.
“Keep in mind that … inflation a year ago was very low; it was about zero,” Macklem said. “So the prices today are being compared to very low prices a year ago.
“There are some goods and services whose prices plummeted in the darkest days of the pandemic a little over a year ago,” he continued. “As those prices normalize again, you’re getting some large year-over-year increases, but, really, these prices are basically normalizing to where they were before the pandemic.”
Macklem said he’s worried about some economic scarring, noting long-term unemployment is very high. In previous deep recessions, people who’ve been out of work for long periods become discouraged and drop out of the labour force, hampering the economy’s overall capacity to grow, he said.
Macklem says the central bank is getting more confident that Canada will enjoy a strong rebound, and pointed to June’s employment numbers as proof.
“We do think scarring will be less than what we thought it might be six months ago, because we’re more confident in that recovery,” he said. “But it is a concern.”
Trevor Tombe, who teaches economics at the University of Calgary, said the report confirmed what other data were showing: The pace of the economic recovery is increasing dramatically because of vaccination. He said short-term inflation might be higher than projected, but it also means the central bank will start gradually normalizing its monetary policy.
“We’re seeing (normalizing), with a slight tapering in their purchasing of government bonds going to $2 billion per week, down from $4 billion,” Tombe said.
“Over time … interest rates will (return to normal). How that will affect an individual Canadian will depend on whether you’re a borrower or a lender, for example. Overall, a stronger economy means employment will be higher, and that wages will be higher. It is very encouraging to see.”
Royce Mendes, head of CIBC Economics, agreed with much of what Tombe had to say, adding there are still risks to the economy, including the COVID variants of concern.
But Canadians should view the latest monetary report as a sign of the Bank of Canada’s increasing confidence in the economy, he said.
The central bank also expects that 20 per cent of households will spend the money they saved during the pandemic at retail stores, which Mendes said will give businesses a big boost.
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