Interest rates to the floor until at least 2022

Des taux d’intérêt au plancher au moins jusqu’en 2022

Photo: Adrian Wyld, The canadian Press
The governor of the Bank of Canada, Tiff Macklem, chaired his first monetary policy meeting since it was the successor to Stephen Poloz at the beginning of last month.

That one is not mistaken there. Once the first rebound of the economy past, the recovery will be slow, uneven, and exposed to relapses caused by the pandemic coronavirus, warns the Bank of Canada, which reports at the same time its intention to keep its interest rates low for a long time.

The central bank has surprised person on Wednesday, leaving its key interest rate at what it sees as its floor level, that is to say, of 0.25 %. It is, however, gone further in easing its monetary policy, indicating that the cost of money in the country will not begin to rise only when the economy will have largely caught up with its backlog due to the crisis caused by the pandemic COVID-19, is likely to be not before somewhere in 2022.

“My main message to Canadians is that the interest rates are very low and they will remain so for a very long time “, summed up the new governor of the institution, and Tiff Macklem, in a teleconference press.

Faithful to the rule of conduct it has set since the beginning of the crisis, “because of the extreme uncertainty” of the situation, the Bank has waived the set of economic forecasts in good and due form in the portrait of the situation, as it stands in the edition of summer of his Report on monetary policy, opting instead for a “middle scenario” supposed to reflect ” a balance between the probability that the best-and worst-possible outcomes are realized “.

My main message to Canadians is that the interest rates are very low and they will remain so for a very long time

— Tiff Macklem

Under this scenario, a little less than half (40 %) of the vertiginous plunge of 15 %, the pandemic and containment measures governments have imposed to the canadian economy between the beginning of the year and the trough of the crisis in April will already have been deleted at the end of the month of September in the favour of the déconfinement and aid policies “vigorous” of the government. The scenarios “worst case scenario” mentioned by the Bank in its report in the month of April would have been avoided, argued the one who had to preside over his first monetary policy meeting since it was the successor to Stephen Poloz at the beginning of last month. But the recovery ” unusually strong for the reopening [of the economy] will probably be followed by a longer recovery slow and uneven “.

A path may still be long

It is the policy of containment explain only about 60% of the shock imparted to the economy, believes the Bank of Canada. The impact of the pandemic on the confidence and behaviour of consumers and businesses, meanwhile, will take time to mitigate, as the damages suffered by the economic sectors most exposed, the difficulties of some workers to find employment, the inevitable bankruptcy of several companies and the effect of the reduction in the number of immigrants and foreign students received in the country.

According to the scenario of the Bank of Canada, the canadian economy should be folded up from 7.8 % at the end of the current year, after expanding 1.7 % in the last year and before to grow 5.1 per cent next year and 3.7% in 2022.

It would be better that the drop of 8.4 % this year and rebound to 4.9 percent next year as it predicted last month the international monetary Fund. But to do this, specify the Bank, it will be necessary that the country avoid a second wave of contamination that would require a reconfinement on a large scale, and that the pandemic has become ancient history no later than mid-2022 in favor of a vaccine or an effective treatment.

By then, inflation should stay well below the 2% target of the Bank, to 0.6 % on average this year, 1.2% next year and 1.7 % in 2022. However, the central bank “will maintain [its] key rate at its floor value until the excess capacity in the economy to be reduced, so that the inflation target of 2 % is achieved in a sustainable way,” announced on Wednesday its governor, which would have the higher interest rates until at least 2022.

New tools of monetary

This indication of long-term part of the new tools of central bank intervention and is not without recalling the darkest days of the last financial crisis, while failing to be able to further reduce its key interest rate already at 0.25 %, the Bank of Canada was committed, in April 2009, to leave it unchanged at least until July of the following year.

Another intervention tool alternative, the massive injection of liquidity by the Bank of Canada since the beginning of the pandemic was supposed to be used only to avoid a crash of the financial markets. But now that this objective has been achieved, Tiff Macklem and his institution no longer defend want to proceed like the u.s. federal Reserve or the european central Bank’s “quantitative easing” by purchasing at least $ 5 billion of federal government bonds per week in order to pull down the cost of credit on the financial markets.

This is great, the Trudeau government had just announced that it expected that its assistance policies emergency cover its deficit of 343 billion this year.

“The canadian economy has suffered a shock history and the response of the authorities was also to be historical,” said Tiff Macklem.

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