By Gloria Galloway
OTTAWA (MaceNews) – The Bank of Canada is laying out two economic prospects for the country as it recovers from devastating effects of the global pandemic – one positive and one negative – but the bank’s governor says he is optimistic that the better-case scenario is achievable.
In its Monetary Policy Report released Wednesday, the bank said quick containment of the COVID-19 virus and a near-term relaxation of lockdown measures would lead to a deep but short-lived recession followed by a strong rebound in activity, particularly if the price of oil also rebounded. But, said the bank, longer-term restrictions would hit households hard, permanently close businesses, and create a much weaker recovery among Canada’s trading partners. The bank did not spell out what specific economic growth outcomes would follow from either scenario.
The negative economic scenario had to be considered because it is important to understand what could happen if the pandemic is not quickly suppressed and the economic engines are not soon restarted, Stephen Poloz, the bank’s governor, told a news conference following the release of the report. But, he said, “I am reasonably optimistic that the positive scenario that we have here, what I call the best-case scenario, is still achievable.”
Poloz attributed his optimism primarily to programs put in place by Canada’s federal government. These include new benefits paid to workers who have lost their jobs as a result of the pandemic but do not qualify for employment insurance, as well as large wage subsidies for employers who keep workers on their payroll even as their business falls off.
In addition, he said, money can be borrowed at low rates which means that, when the economy rebounds, consumers will have easy access to credit.
The bank made no change Wednesday to its target overnight rate of 0.25% – which it considers its effective lower bound. The rate has been lowered three times since the beginning of March to help stabilize the economy and complement the government’s pandemic efforts.
Poloz said deflation is a significant concern as the disease forces the world into recession.
“Inflation targets provide an anchor for the economy—particularly inflation expectations—and a guide for policy actions equally in today’s situation,” he said. “If inflation were to fall short of target for an extended period, faith in that anchor would be eroded, and policy-makers would face even greater challenges in returning the economy to full capacity.”
That challenge could be particularly acute should inflation fall persistently below zero, increasing the real value of outstanding debts and eroding the ability of companies and households to make payments —which would a very difficult mix for the financial system, said Poloz.
Fortunately, he said, the risk of sustained deflation in Canada is low as a result of the response by governments, the fact that Canada entered the pandemic with its economy operating near potential, and Canada’s record of keeping inflation close to target for more than 25 years.
The bank’s recent actions – which included programs to purchase secondary corporate bonds, a provincial bond purchase program, a Canada Mortgage Bond purchase operation, and an increase in acquisitions of Government of Canada treasury bills – mean corporations and investors can maintain confidence that inflation rates will be managed, said Poloz.
Carolyn Wilkins, the senior deputy governor of the Bank of Canada, told the news conference that markets are stabilizing after the initial shock of the pandemic, but the bank must still ensure a longer-term return to normal.
The bank’s actions “helped unlock some of those markets and we have seen a narrowing of spreads as well as more smooth activity,” said Wilkins. “But I wouldn’t pretend that the conditions in markets, particularly the term markets past one year are particularly functioning well. Better than they were, but, if we think about our objective to have well-functioning markets so that we set the stage for a good recovery and allow people and firms to have access to credit, then the programs that we introduce today will contribute to that.”