MNI INTERVIEW: BOC May Bring More Vaccine Optimism in January

The Bank of Canada may be saving some of its optimism about Covid vaccine breakthroughs for the next policy meeting in January, when it will also deliver a wider forecast paper, CIBC Senior Economist and former central bank researcher Royce Mendes told MNI.

The next Monetary Policy Report may focus an upgraded GDP forecast on 2022, because the 2021 expansion may be curbed by tighter health restrictions imposed in recent weeks, Mendes said in an interview. Earlier on Wednesday the central bank took note of progress on vaccines and said in the near term the global and domestic economy face volatility from the second wave of Covid-19.

Canada this year has shown resilience including the bounce-back from the spring lockdown that defied worst-case projections. That also suggests less need to embrace dire scenarios about "scarring" over a longer period, he said.

"I wouldn't be surprised if the tone of the next MPR sounded a little more optimistic," said Mendes, who at the BOC was a foreign reserve portfolio manager and principal researcher in the financial markets branch. "The big change since October is just feeling like there is an end to these crazy times now, and that will show up I think in various ways in the next forecast."

The BOC's October MPR predicted 4.2% growth in 2021 and 3.7% in 2022, following a 5.7% drop this year, while CIBC projects a 5.1% burst in 2022.

CONSUMER-LED RECOVERY

Governor Tiff Macklem on Wednesday affirmed he won't raise the 0.25% policy rate before 2023 and QE of at least CAD4 billion a week until the recovery is well underway. That announcement came hours before Canada approved its first coronavirus vaccine, a development that pressures policy makers to advance their assumption one would be widely in use by mid-2022.

While the BOC has to be cautious so long as Covid infections continue, monetary policy is also being supported by strong fiscal policy, Mendes said. Canada's budget deficit is the highest as a share of GDP since World War II, and one of the largest among major economies.

"You should clearly expect that things like consumption are going to be major drivers of the economic recovery," he said. "Starting in the second quarter, you should start to see consumption, they might talk about it."

Given that dominance, the BOC statement's reference to a strong dollar amid low exported commodity prices is unlikely to be an overriding concern, Mendes said. "There's not a lot they can do," to fight it, he said.

CALIBRATING QE PROGRAM

The BOC added hints that optimism won't turn radical, such as noting growth may be weak in the first quarter, and saying it retains the right to keep recalibrating its CAD4 billion a week of QE, Mendes said. Policy makers in October scaled back QE from CAD5 billion while shifting purchases to longer-term assets, saying the actions would provide just as much support. Governor Macklem has also downplayed concerns that owning even half the government bond market would be a major problem.

"At some point in 2021, they are going to have to again recalibrate this program," Mendes said. "They are talking about the room that they have to further stimulate the economy with regards to the QE program, and maybe that is a bit of a push back against the expectation that it has to wind down simply because of the size of the program."