Hello. Please join me in discussing today’s policy announcement and the Monetary Policy Report (MPR).
My message today is twofold: increased confidence and continued attention.
A year ago, during my first MPR as governor, the economy was in a very deep hole. We were just emerging from the first wave of the virus, over two million Canadians were unemployed, and inflation was well below our target range of 1-3%. The uncertainty was extremely high. Vaccines were in development, but no one knew when they would be available or even if they would prove to be effective.
A lot has happened since then. We suffered two more waves of viruses, which hampered the recovery. But thanks to the resilience and ingenuity of Canadian households and businesses, and exceptional financial and monetary support, the economy has continued to grow. The situation was turbulent and very uneven, and everyone faced a lot of uncertainties. But the economy has proven to be surprisingly resilient. And now very effective vaccines have arrived.
With the decline in cases, rapid progress in vaccinations and the easing of containment measures, the Board of Governors is increasingly convinced that growth will rebound strongly as the economy reopens, and this time, growth will be. more sustainable.
Second, as the unique circumstances created by the pandemic continue to evolve, there is a need to continue to pay close attention to the dynamics of the recovery and inflation. Globally, the economic outlook remains heavily dependent on the evolution of the virus and new variants are of concern. In Canada, we still have some way to go towards a full recovery, and the rebound in economic activity will take place at different speeds depending on the sector. The process of reopening the economy will not be entirely smooth. For example, we are experiencing bottlenecks for certain goods and services because demand rebounds faster than supply can recover. These unique circumstances of the pandemic are now helping to push inflation temporarily above our target range.
As we reopen the economy, we expect some volatility and will continue to pay close attention to the progress of the recovery and the development of inflation.
Before I get to your questions, allow me to say a few words about the political discussions of the Governing Council.
We have spent some time reviewing the progress and risks of the global recovery. The global economy is recovering strongly, but vaccination rates and growth are uneven between advanced and emerging market economies. Growth is particularly strong in the United States, which is more advanced in its reopening and which is benefiting from a significant fiscal stimulus. Oil prices have increased with stronger global demand, while the prices of other commodities remain high. The Canadian dollar is close to its April level against the US dollar, but it is slightly stronger against a larger basket of currencies.
Back in Canada, we discussed the many ways the pandemic is affecting the economy and the prospects for recovery. There was a strong consensus that growth will strengthen and broaden in the coming months as consumers return to more normal spending habits, higher foreign demand stimulates exports, and consumers return to more normal spending patterns. companies will increase their investments.
Consumption should continue to be the engine of the recovery. Some of the sectors affected by the lockdowns, including retail, food service and other hard-to-outreach sectors are already experiencing a rebound, while others, such as business and international travel, may take longer to recover.
Employment is expected to continue to rebound over the next few months as the reopening process continues. The job gains we saw in June are encouraging, especially for service workers who suffered the brunt of the lockdowns. But to get back to the pre-pandemic employment rate, we still have over 500,000 jobs to recover. Our recent Business Outlook Survey have shown that plans to hire staff are prevalent as companies prepare for growing demand, but finding workers with the right skills can be difficult and will take time.
Comparing today’s outlook with our April forecast, we see that growth in the first half of this year is a bit weaker than expected, reflecting both supply chain issues and restrictions in the market. more prolonged confinement in parts of the country. But looking ahead, we expect a strong rebound in the second half of this year and more sustained growth through 2022 than we previously expected. We now expect the economy to grow around 6% in 2021, slightly lower than our April forecast. We have revised our growth forecast for 2022 upwards to 4½% and project growth of 3¼% in 2023.
The Governing Council also discussed the extent of the economic slowdown and the prospects for potential growth. Estimates of these measurements have always been imprecise but are particularly difficult given the rapid changes brought about by the pandemic. In the projection, economic underutilization is absorbed in the second half of 2022. To help manage the uncertainty surrounding this assessment, we will be monitoring a wider range of underutilization indicators, including a range of market metrics. job.
The inflation outlook reflects the dynamics of aggregate supply and demand in the economy, as well as a number of temporary factors. In recent months, consumer price index inflation has exceeded the Bank’s 1-3% target range. Three major factors are at the origin of this temporary force, all linked to the pandemic. First, gasoline prices have rebounded from very low levels a year ago and are now above pre-pandemic levels. Second, other prices that fell sharply last year with falling demand are now returning to more normal levels as the economy reopens. And third, disrupted global value chains and pandemic supply constraints, including shipping bottlenecks and a global semiconductor shortage, have pushed up prices for cars and some others. goods. Overall, supply bottlenecks are creating a sharper price movement that temporarily pushes inflation up, and these supply issues now appear to be larger than previously thought. As a result, inflation is now expected to be slightly above the target range until 2021. But these temporary effects are expected to dissipate towards the end of this year and inflation is expected to return to 2% in 2022. We expect this. that the factors driving inflation up are temporary, but their persistence and magnitude are uncertain and we will be watching them closely.
Longer term, given our commitment to keep the policy rate at the lower effective limit until the margin is absorbed, the economy should move towards slightly excess demand, so inflation is slightly higher. on target until 2023 before approaching the target in 2024.
In short, the reopening of the economy and the strong progress in vaccinations have given us reasons to be more optimistic about the direction of the economy. But we are not there yet and we are aware that the process may be bumpy and some scars will remain.
By today’s decision, the Governing Council considered that the recovery still needs extraordinary monetary policy support. We remain committed to keeping the key interest rate at the effective lower limit until the economic downturn is absorbed so that the 2% inflation target can be reached on a sustainable basis. Based on our current projection, this occurs in the second half of 2022.
Our quantitative easing (QE) program continues to reinforce this commitment. We have decided to adjust the program to a target of $ 2 billion in weekly Government of Canada bond purchases, down from a target of $ 3 billion per week. This adjustment reflects the continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.
Decisions on further adjustments to the pace of net bond purchases will be guided by the Governing Council’s ongoing assessment of the strength and sustainability of the recovery. If the economy evolves broadly in line with our outlook, it will not need as much quantitative easing over time. Further adjustments to our quantitative easing program will continue to be incremental, and we will be deliberate both in our assessment of incoming data and in communicating our analysis. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and meet the inflation target.
With that, let me stop and turn to you for questions.