Bank of Canada Policy Makers ‘Hopeful’ Worst Case Can be Avoided

(Bloomberg) -- Bank of Canada policy makers emerged from interest rate deliberations this week hopeful the economy will avoid the most-severe outcome, with financial market functioning normalizing and amid signs the nation's income support programs are working.

The latest data suggest that while the impact from the Covid-19 pandemic has been severe, it seems to have peaked as countries reopen their economies, Deputy Governor Toni Gravelle said Thursday in prepared remarks of a speech aimed at providing insight into the rate discussions.

Financial conditions have also begun to improve, Gravelle said in the central bank's latest Economic Progress Report. Support programs meanwhile seem to be in line with the scale of the labor income lost during the crisis.

“Naturally, my colleagues on Governing Council and I talked a lot about where we think the economy will go from here,” Gravelle said in a speech that reaffirmed the optimistic tone from the rate decision Wednesday. “And we saw some reasons to be hopeful that the worst can be avoided.”

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At its decision this week, the central bank pared back estimates of the scale of the downturn, prompting policy makers to wind down some market operations. The central bank also left its benchmark interest rate unchanged at 0.25%, which Gravelle said is “as low as we think we can reduce it without causing problems for the financial system.”

The Ottawa-based central bank however has recommitted to maintaining its planned purchases of government bonds until a recovery is “well underway,” with Gravelle reiterating that risks remain and much will depend on how quickly lockdowns are lifted and whether there are any future disruptive waves of Covid-19.

“The Bank is prepared to augment the scale of any of its programs if needed to support market functioning,” Gravelle said. “And if further monetary stimulus is required to meet our inflation target, the Bank has tools available to deliver that stimulus.”

Ultimately, the future stance of monetary policy will depend on the balance between the demand and supply responses during the recovery -- which will determine the outlook for inflation, said Gravelle, while adding the central bank is more worried about deflationary forces.

In the lead up to the July rate decision and monetary policy report and beyond, “it will be key for us to understand how the pandemic has affected demand, employment and the economy's capacity to produce goods and services,” Gravelle said.

“Governing Council will continue to ensure we use the right tools for the right job, and that our response is proportional to the level of financial system or economic risk we see,” he said.

The bank also said it will be keeping a close eye on what the demand for key Canadian exports will look like in the recovery. “We will be paying close attention to how the pandemic is affecting growth and demand in key markets for Canadian exports.”