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Bank of Canada keeps rate steady at 0.25% as it expects economy to shrink for the first quarter of 2021

Bank of Canada keeps rate steady at 0.25% as it expects economy to shrink for the first quarter of 2021

Vaccination efforts key to economic recovery, Bank of Canada says as it keeps rate on hold

OTTAWA -- The economy will go in reverse for the first quarter of 2021, the Bank of Canada said Wednesday as it kept its key interest rate on hold, warning the hardest-hit workers will be hammered again on a path to a recovery that rests on the rollout of vaccines.

Workers in high-contact service industries will carry the burden of a new round of lockdowns, which the central bank warned will exacerbate the pandemic's uneven effects on the labour market.

The longer restrictions remain in place, the more difficult it may be for these workers to find new jobs since the majority move to a new job but in the same industry.

Bank of Canada Governor Tiff Macklem said in his opening remarks at a late-morning news conference that the first-quarter decline could be worse than expected if restrictions are tightened or extended.

The central bank kept its key rate on hold at 0.25 per cent on Wednesday, citing near-term weakness and the "protracted nature of the recovery" in its reasoning.

The short-term pain is expected to give way to a brighter outlook for the medium-term with vaccines rolling out sooner than the central bank expected.

Still, the bank said in its updated economic outlook, a full recovery from COVID-19 will take some time. Nor does the Bank of Canada see inflation returning to its two per cent target until 2023, one year longer than previously forecast, and the bank's key rate is likely to stay low until then.

Overall, there is reason to be more optimistic about the economy in the medium-term, but it will still need extraordinary help from governments and the central bank to get there, Macklem said.

The bank's latest monetary policy report, which lays out its expectations for economic growth and inflation, forecast that COVID-19 caused the economy to contract by 5.5 per cent last year.

Despite an upswing over the summer and fall that may have spared the country from a worst-case economic scenario, the drive to a recovery will hit a pothole over the first three months of 2021.

The bank forecasts real gross domestic product to contract at an annual pace of 2.5 per cent in the first quarter of 2021, before improving thereafter if severe restrictions start easing in February.

The bank expects growth of four per cent overall for 2021, then 4.8 per cent next year, and 2.5 per cent in 2023.

Trevin Stratton, chief economist at the Canadian Chamber of Commerce, was more dour on lockdowns, saying the group doesn't expect them to ease until well into March.

"During this period, we need to provide the right kind of support to individual Canadians and to businesses to get them through the lockdowns, recognizing that neither group is in the same financial position as it was in March 2020," he said in a statement.

For the central bank, that help could come through ramping up its bond-buying to force down interest rates, or a small cut to its key policy rate among options Macklem mentioned Wednesday.

Keeping the door open to such a "micro" rate change is a shift in tone, as Macklem has previously said the current 0.25 rate is as low as it would go.

The bank said the path for the economy will be like riding a roller-coaster as resurgence in COVID-19, or new, more virulent strains, weigh down a recovery in one quarter before leading to strong upswing in the next.

Inflation may be equally rocky.

Gasoline prices, which have weighed down the consumer price index during the pandemic, will by March be "well above their lows of a year earlier," the bank's report said. That should significantly bump inflation, the report said, possibly to two per cent in the second quarter.

The bump will even out over the rest of the year. The bank forecasts inflation for 2021 at 1.6 per cent, then 1.7 per cent in 2022 and 2.1 per cent in 2023.

Statistics Canada reported Wednesday the annual pace of inflation cooled in December to 0.7 per cent compared with 1.0 per cent in November.

The agency also reported that the average last month of Canada's three measures for core inflation, which are considered better gauges of underlying price pressures and closely tracked by the Bank of Canada, was 1.57 per cent.

The central bank's lookahead rests on efforts to vaccinate Canadians by the end of the year without any hiccups in that timeline, which would mean broad immunity six months sooner than the bank previously assumed.

"It's going to be very important that Canada get the vaccines, we get them distributed to Canadians and that Canadians take the vaccine," Macklem said.

A shorter timeline for vaccinations should mean less scarring overall for the economy in the form of fewer bankruptcies and fewer workers out of jobs for long stretches, which makes it more difficult for them to get back into the labour force.

Jordan Press

The Canadian Press

Published Wednesday, January 20, 2021 4:40AM EST

Last Updated Wednesday, January 20, 2021 3:14PM EST

This report by The Canadian Press was first published Jan. 20, 2021.

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