E The Bank Of Canada Clings To Hope In Its Recent Rate Decision

It is very difficult for central banks to maintain strong convictions for a return to economic growth in the face of rising COVID-19 caseloads and especially on the heels of a rather disappointing final quarter of 2020. Such is the case with the Bank of Canada which announced that it will retain its overnight rate at the effective lower bound of 0.25%, supported by its quantitative easing program featuring the purchase at least C$ 4 billion bonds per week.

Photo by Toa Heftiba on Unsplash

With considerable trepidation, the Bank acknowledges,

the COVID-19 pandemic continues to take a severe human and economic toll in Canada and around the world. The earlier-than anticipated arrival of effective vaccines will save lives and livelihoods and has reduced uncertainty from extreme levels. Nevertheless, uncertainty is still elevated, and the outlook remains highly conditional on the path of the virus and the timeline for the effective rollout of vaccines"

The hope is expressed on its reliance of “the arrival of effective vaccines combined with further fiscal and monetary policy support have boosted the medium-term outlook for growth”. The Bank anticipates global growth to average around 5% for 2021-2022, noting that financial markets and commodity prices have been rather buoyant of late.

But the short -term presents a very disquieting picture. Whatever recovery has been achieved in the second half of 2020 has been clearly stopped in its tracks as many countries, including Canada, have experienced a second, stronger, wave of COVID-19 along with new mutations. This has forced new shutdowns for many sectors and represents a significant setback in the efforts to re-ignite economic growth. As a consequence, the Bank expects a contraction in 2021Q1.

Again, hope drives its forecast, as the Bank assumes restrictions are lifted later in the first quarter, allowing for a rebound in consumption, exports, and business investment. This is a very heroic assumption, but the Bank has no choice but to embrace that outlook. In other words, the pandemic and public health policy continue to condition the economic outlook, not monetary or even fiscal policy.  

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