e c o n o m i c u p d ate Q 1 the beginning of the end by avery Shenfeld
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o paraphrase Sir Winston, this is not the end of the pandemic, but it might be the beginning of the end, or at least the end of the beginning, and it’s time for monetary policymakers to give more weight to that fact in their forward guidance. The Bank of Canada has its opportunity to do so, but it faces a tricky task in balancing some good economic and vaccine news with a desire to avoid sounding overly hawkish just yet. For 2021, and likely much of 2022, monetary stimulus will still be warranted. Experts are cautioning that we need to be wary of COVID variants that could spark an escalation of cases in the coming weeks. Unemployment remains highly elevated, the most heavily impacted sectors are still reeling, and many businesses and households are living off of temporary government assistance. Even so, recent Canadian data have surprised to the upside, as we get more juice out of resource production, home building and other sectors that have stayed up and running through the second wave of the pandemic. The Bank of Canada doesn’t publish a new forecast until April, but it will have to acknowledge that its January projection now looks to have been too conservative, as was ours at that time. The Bank will reiterate that we’re a long way from closing the output gap and seeing sustained (not one-time) 2% inflation, but when it publishes a new forecast in April, it might have to move the timing of that into late 2022. We’re in the last couple of months in which the Bank’s asset portfolio will see heavy maturities. That’s allowing the BoC to sustain a $4 bn per week pace of purchases without driving up its overall balance sheet, but the maturities will drop off sharply after April. As a result, at its April announcement, we look for the Bank to cut its bond purchase program by $1 bn per week. Its March statement doesn’t have to give a warning about that post-April adjustment, but we can’t rule that out.
Our rates strategist will have more to say in his report on Monday about how to trade along the curve given that context. Despite these coming shifts in tone, the Bank of Canada can’t afford to get too hawkish, too soon, in a short March statement that doesn’t have a fully-fledged forecast. It has to weigh its words given that bond yields have backed up a fair bit, and the market is already pricing-in outright rate hikes a bit earlier than what we’re actually likely to see. Moreover, the Fed is still talking very dovishly, unreasonably so in our view, about how long it can wait to hike. The US economy outperformed Canada in 2020 by a wide margin, has more stimulus coming, and is ahead on vaccines. Governor Macklem can’t afford to get too far ahead of Chair Powell, lest he send the Canadian dollar through the roof. If he can, before he spills the beans on a pre2023 rate hike, Macklem would like to wait until Powell gives his own Churchillian speech about the beginning of the end to the war on COVID, and the need to rethink the timetable for monetary policy adjustments. Continued next page. MARCH 2021 • DOLLARS & SENSE PERSPECTIVE | 11
