MNI POLICY: BOC Sees Risks From Spending Burst and Job Slack

Bank of Canada Deputy Governor Larry Schembri said Thursday the economy faces competing risks from a potential burst of spending by consumers who have saved up CAD180 billion of government relief checks and on the downside from job losses doubling those of the global financial crisis.

"These savings are large enough to meaningfully affect the trajectory of the economy. If Canadians spend more than we expect, it would strengthen the recovery in consumption and employment," Schembri told a restaurant industry group. "However, recent data tell a mixed story about the labor market, which remains a long way from a full recovery."

The BOC on Wednesday affirmed conditions for raising the record low 0.25% interest rate probably won't arrive until into 2023, and said CAD4 billion a week of asset purchases could be adjusted as policy makers gain more confidence in the economic rebound. The BOC also raised its inflation forecast in coming months to around 3%, and some investors expect a taper to CAD3 billion at its next meeting in April as it upgrades its full economic outlook.

Inflation will be boosted by base effects from last year's drop in gasoline and service prices but "the large amount of slack in the economy should cause inflation to moderate" afterwards, Schembri said.

CATCH-UP DENTISTRY?

While the economy has been more resilient than expected in the fourth quarter of last year and the first quarter of 2021, there are also near-term risks of a third wave of Covid-19 and delays in vaccinations, he said. More companies could shut down as the pandemic goes on and long spells of unemployment will make it harder for some people to find work again, Schembri said.

"Monetary policy stimulus will be needed for an extended period to mitigate these risks and support both the restructuring and recovery of our economy," he said.

The speech comes the day before economists predict Statistics Canada will report 100,000 jobs were added in February, making up less than half the losses of the prior two months when local governments imposed new lockdowns. Unemployment is seen declining to 9.2% from 9.4%, about 4 percentage points above record lows seen before the pandemic.

Consumer spending is difficult to predict because while more than half the decline in consumer spending has been in close-contact services, it's unclear how much catch-up spending can be done for things like dental work or missed vacations, said Schembri.