MNI POLICY: BOC MPR Sees Slack Into 2023, Vaccines by Yearend

The Bank of Canada's Monetary Policy Report Wednesday shaved its 2021 growth forecast to 4% from 4.2% even as it said vaccines will be widely available this year instead of next, boosted 2022 growth and reiterated slack in the economy will keep inflation from stabilizing around 2% until 2023.

"Canada and many countries are experiencing a setback in their economic recoveries" amid the rise in Covid-19 cases, according to the report from Ottawa. "However, an earlier-than-anticipated start to vaccination programs has pulled forward the timeline for achieving broad immunity and improved the outlook for growth in the medium term." The 2022 growth forecast was raised to 4.8% from 3.7%.

Estimated slack in the economy was reduced to a 2.75%-3.75% range from the October estimate of 3.5%-4.5%, still rivaling the worst of the 2008-09 recession, the BOC said. This year's inflation estimate was boosted to 1.6% from 1% on higher gasoline prices and consumer demand, while 2022 was unchanged at 1.7% and a new 2023 projection put it at 2.1%.

Risks around the BOC's 2% inflation target remain "roughly balanced," though "downside risks pose a greater concern because inflation is currently low and the policy rate is at its estimated effective lower bound."

Other highlights:

• "The Canadian dollar has risen steadily since October, reaching its highest level since early 2018. This increase has been driven primarily by broad-based weakness of the US dollar."
• Vaccines should be widely available in Canada by the end of this year, sooner than the October estimate of mid-2022.
• "With vaccines being rolled out earlier than anticipated, the recuperation in the Canadian economy is now more secure, and medium-term growth is forecast to be stronger. Nevertheless, considerable economic slack remains in the economy, and a complete recovery will take some time. As a result, inflation is not anticipated to return sustainably to its 2 percent target until 2023."
• GDP will shrink at a 2.5% annualized pace this quarter, following a 4.8% expansion in the fourth quarter of last year. The central bank didn't provide a detailed outlook for the second through fourth quarters of the year. The economy will grow 2.5% in 2023.
• Quarterly growth rates will remain "choppy" and a "protracted recuperation" for the economy is expected, the BOC said. "The large number of long-term unemployed workers is a serious concern because their skills may erode and their attachment to the labor force may decrease."
• The recovery is supported by consumer spending, strong fiscal support and monetary policy, the BOC said. Trade remains a drag on growth this year before making little contribution next year, while consumption makes up about three-fifths of next year's growth. Business investment outside of the energy industry should also make big gains.
• The BOC has extended the weighted average maturity of its balance sheet assets to seven years from six years since October, and has increased its share of the government bond stock to 36% from 32%. The balance sheet may shrink from CAD548 billion in coming months as CAD140 billion of t-bills and term repos mature.
• "While the output gap is expected to close in 2023, the timing is particularly uncertain."