Bank of Canada sees economy below pre-COVID-19 levels until 2022, rates low for long time

By Kelsey Johnson and Julie Gordon OTTAWA (Reuters) - Canada's economic activity will not return to pre-pandemic levels until 2022 and interest rates will remain low for an extended period, the Bank of Canada said on Wednesday, as it again held its key overnight rate steady. The central bank sees a long, slow recovery and will keep its quantitative easing programs in place until that recovery is 'well under way,' Bank of Canada Governor Tiff Macklem told reporters after the decision

Reuters July 16, 2020 00:08:17 IST
Bank of Canada sees economy below pre-COVID-19 levels until 2022, rates low for long time

Bank of Canada sees economy below preCOVID19 levels until 2022 rates low for long time

By Kelsey Johnson and Julie Gordon

OTTAWA (Reuters) - Canada's economic activity will not return to pre-pandemic levels until 2022 and interest rates will remain low for an extended period, the Bank of Canada said on Wednesday, as it again held its key overnight rate steady.

The central bank sees a long, slow recovery and will keep its quantitative easing programs in place until that recovery is "well under way," Bank of Canada Governor Tiff Macklem told reporters after the decision.

"We recognize that households and businesses are facing an unusual amount of uncertainty. Against that background, we are being unusually clear that interest rates are going to be low for a long time," Macklem said.

The outlook for the economic recovery in the United States, meanwhile, has dimmed amid a rapid rise in cases of the new coronavirus, which will impact Canadian exports, Macklem said. The U.S. is Canada's largest trading partner.

"In the last couple of weeks with the rapid rise of cases of coronavirus in the U.S., we did take down our U.S. projection," Macklem said. "That does spill back into Canada."

The Bank of Canada released a central scenario earlier on Wednesday that showed U.S. real gross domestic product (GDP) falling 8.1% in 2020 and rising 3.4% in 2021. Canada GDP is projected to fall 7.8% in 2020, then rise 5.1% 2021, reaching pre-pandemic levels in early 2022.

The central bank noted that after an initial bounce, Canada's economic growth will slow amid the effects of social distancing, subdued consumer and business confidence, and "a slow rebound in foreign demand."

Globally, the bank's outlook assumes the pandemic will have largely run its course by mid-2022, though much uncertainty remains in the interim as well as an ongoing risk of regional flare-ups.

"Overall, the risks appear to be tilted to the downside, largely because of the potential for a second wave of the virus," the central bank said.

A second wave that required a broad-based lockdown in Canada and globally would impact the Bank of Canada's central scenario outlook, said Macklem.

"We'd be well below the central scenario and that would imply we would need more monetary policy stimulus to get back to our inflation target," said Macklem.

The Bank slashed rates three times in March to 0.25% and launched it's first-ever large-scale asset purchase program. It held rates at 0.25% on Wednesday.

"They've made it pretty clear that they're going to keep the pedal to the metal in terms of easy policy until the economy has recovered," said Doug Porter, chief economist at BMO Capital Markets.

The Canadian dollar strengthened to a six-day high at 1.3518 per U.S. dollar, or 73.98 U.S. cents, helped by optimism about a coronavirus vaccine.

The Bank said that its central scenario now sees Canadian oil production on a "considerably lower path than before the COVID-19 crisis," due to weaker investment in the face of reduced demand and low oil prices

(Additional reporting by Fergal Smith, Jeff Lewis, Nichola Saminather and Moira Warburton in Toronto, Steve Scherer in Ottawa; Editing by Bernadette Baum)

This story has not been edited by Firstpost staff and is generated by auto-feed.

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