MNI POLICY: BOC Says Firms and Consumers See Uneven Recovery

The Bank of Canada said companies and households see a slow and uneven recovery amid a mix of news about the second wave of the pandemic and vaccine breakthroughs, a report Monday showed.

Two-thirds of firms late last year saw inflation at or below the central bank's 2% inflation target over the next two years, even as many reported rising costs to deliver goods and said frayed supply chains meant a majority would struggle to meet an unexpected rise in demand. The balance of opinion about growth of future sales rose to +48, the highest since 2009, but that more reflected a partial comeback from weakness amid the first Covid-19 wave, according to the quarterly Business Outlook Survey.

"Although business sentiment has strengthened broadly, it remains solidly negative for many firms, including those in high-contact services. These firms expect demand to remain weak for some time because of concerns around COVID‑19," according to a report based on about 100 interviews done mid-November to early December that missed some of the latest tougher provincial government health restrictions.

The report comes the week before the next rate decision, and Governor Tiff Macklem has pledged to hold his 0.25% interest rate into 2023 to allow the economy to rebuild, and to buy at least CAD4 billion a week of debt until the rebound is well underway.

The overall business survey indicator, which has some correlation to spare capacity in the economy, swung to +1.29 from a revised -2.18 in the previous report.

The consumer survey also showed that "the economic recovery is expected to be slow and uneven," the BOC said. "Nonetheless, there is growing optimism, as more people expect that life will eventually return to normal" because of progress in development of vaccines."

Consumers also indicated they will spend some of the savings they built up as government relief money supported incomes, the BOC report showed.

While job market pessimism was reflected in wage growth expectations holding at a record low 1.1%, families eager to flee to bigger suburban homes to ride out the pandemic pushed up the expected rise in future home prices to a record 5%.