MNI POLICY: BOC Says Q1 GDP May Fall, Blunts Vaccine Optimism

Bank of Canada Governor Tiff Macklem on Tuesday said the economy could shrink again in the first quarter of next year as more people contract Covid-19, and cautioned against bringing forward too much optimism about vaccine breakthroughs.

Gross domestic product may post either a small gain or a small decline between January and March, Macklem said at a press conference following a speech. Growth this quarter will likely surpass the 1% gain the BOC had projected in October based on momentum from recent data, he said.

It's too soon to reassess the balance of risks that will be published at the next rate decision in January, Macklem said, declining to comment on the BOC's most recent estimate that a vaccine would only be widely available around mid-2022. Canada has already begun administering doses and Prime Minister Justin Trudeau said most Canadians could get their shots by next fall, with sources telling MNI the BOC will likely need to pull forward its assumption.

"The vaccines are a very positive development," Macklem said. "It's not the only bit of news" and near term "the news is more negative." For one, the economy still has plenty of excess supply, he said.

Canada's dollar is another potential drag, Macklem said, because its recent appreciation is linked more to a broad U.S. dollar decline than home-grown factors, Macklem said. "It's material, it's on our radar screen, that's the message," he said, adding the BOC has no target for the exchange rate. The BOC largely gave up trying to manage the currency in the late 1990s.

Negative interest rates even to deal with another shock "looks more disruptive than helpful," Macklem said at an earlier audience question-and-answer session. While a cut to the current 0.25% rate to something still above zero might work, "the bar to go into negative territory would be particularly high," he said. Other tools such as pushing QE into longer bond maturities, yield curve control could also come into play, he said.