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The Bank of Canada returned to the barricades with a binder of new weapons to combat the economic fallout from COVID-19.
Policymakers left the benchmark lending rate unchanged at 0.25%, but unveiled new programs that will see the central bank buy tens of billions of dollars in provincial bonds and corporate debt, which represents a new push towards quantitative easing, or QE.
“The next challenge for markets will be to manage the increased demand for short-term funding by federal and provincial governments, businesses and households,” said the Bank of Canada in a new policy statement on April 15. “The situation requires special measures from the Central Bank. “
The new operations will expose the central bank to delicate political considerations, as provincial and business leaders may see the Bank of Canada’s support efforts as an opportunity to delay difficult decisions. But the gravity of the situation outweighs concerns about moral hazard, at least for now. In its latest quarterly economic report, the Bank of Canada said that Canada is probably facing the deepest recession in its history.
Policymakers have already implemented half a dozen emergency programs to inject liquidity into the financial markets, including the weekly purchase of at least $ 5 billion in federal government bonds. In the “coming weeks”, the central bank has announced that it will also start buying up to $ 50 billion in provincial debt and up to $ 10 billion in high-quality corporate bonds. Both will be firsts for the Bank of Canada.
“The Canadian economy was in good shape before the COVID-19 outbreak, but has since been hit by widespread closings and falling oil prices,” said the central bank. “The bank’s board of governors is ready to adjust the scale or duration of its programs if necessary.”
Policymakers added, “All of the bank’s actions are aimed at helping to fill the current containment period and create the conditions for a sustainable recovery and the achievement of the inflation target over time.”
The Bank of Canada has decided that there is little to gain from joining the weekly race to produce increasingly apocalyptic economic forecasts, noting that the uncertainty surrounding the current outlook is “unusually high “
Economic growth forecasts are based on previous trends and there is no way of knowing if these have anything to say about a once-in-a-lifetime event, such as the global spread of the coronavirus that causes COVID-19. . The central bank is comfortable predicting a recovery, but “timing and strength” will depend “heavily” on how the pandemic unfolds and the response of businesses and households.
“None of this can be predicted with some confidence,” said the Bank of Canada in its latest quarterly economic report, released on April 15.
This impossible level of difficulty didn’t stop other forecasters from trying, of course.
The International Monetary Fund said this week that the “big lockdown” will cause global GDP to contract by 3% this year, the deepest since the Great Depression, followed by growth of 5.8% in 2021. The fund predicts the Canadian economy will collapse by 6.2% this year, roughly the average for advanced economies, followed by growth of 4.2% next year.
The Bank of Canada would probably have offered something similar if it had tried. Instead, policy makers have presented a “scenario analysis” that offers a range of plausible results. None are great in the short term. The central bank said GDP would be one to three percent lower in the first quarter compared to the fourth quarter, and 15 to 30 percent lower in the second quarter compared to the end of 2019.
“Despite a high level of uncertainty, these estimates suggest that the short-term slowdown will be the sharpest on record,” said the Bank of Canada.
This is the price that governments knew they would have to pay to slow the spread of the virus. The unknown is whether the economy will be the same once the authorities reactivate it.
The Central Bank of Canada has said it is possible that the hundreds of billions of dollars that governments and central bankers have injected into their savings will get things back to normal soon enough.
This would require global containment efforts to be quickly relaxed. If this happens, global demand may recover relatively quickly and supply chains will reconnect “in the short term”. Consumer and business confidence would rebound, further stimulating growth.
The Bank of Canada has noted that many of the industries that have suffered the most from the closure, including accommodation and food, tend to have high turnover, suggesting that they will be able to resume operations without delay.
“In this less severe and less persistent scenario, the decline in economic activity is brutal and deep but relatively short-lived,” the bank said. “The recession would be quickly followed by a strong rebound in activity, especially if the price of oil also rebounded quickly, in line with foreign demand.”
Unfortunately, there is an equally plausible scenario in which the recession changes the nature of the economy, resulting in sluggish growth for a considerable period of time. The impact of the pandemic and the collapse in energy prices could reduce Canada’s ability to produce goods and services without fueling inflation, which would limit economic production. Companies may go bankrupt and not return, or employers may choose to continue with fewer workers, increasing unemployment.
“Together, these effects could cause structural damage to the economy that could not be reversed for several years, if ever,” said the Bank of Canada. “In this second scenario, future growth would be significantly slowed down, with economic activity remaining below its pre-pandemic level for an extended period. “
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