Deputy Governor Timothy Lane talks about the Bank’s decision yesterday to leave the policy rate unchanged. He also discusses how adopting digital technologies supported resilience during the COVID-19 pandemic.
Policy rate unchanged
We decided to leave the policy interest rate at 0.25 percent.
We’re on the road to recovery
The Canadian economy is starting to bounce back from the pandemic.
Lockdown measures have reduced case numbers, and the fast-tracked vaccination rollout is reason for optimism. The economy is growing, household spending is up, and global prices of oil and other commodities are rising. But Canada observed weak employment numbers this spring, as the second and third waves of the pandemic posed setbacks.
The inflation story, though, is a bit more complicated than usual. Prices have rebounded from 2020 and, in some cases, have risen much higher. Inflation is now above our 2 percent target—around 3.5 percent. This is mainly because inflation is measured by comparing today’s prices with those from last year. In this case, that’s when the pandemic caused prices to plummet.
We expect inflation to stay around 3 percent through the summer and then to ease later in the year as remaining slack in the economy pushes inflation down.”
Digitalization supported—and changed—the economy
One reason behind the strong economic recovery is that households and businesses adapted to the pandemic better than we expected—mostly because of our economy’s digital transformation. We managed to avoid more serious negative shocks to the economy thanks to the ability to:
- work remotely
- shop online
- support restaurants through contactless delivery
Moving to a more online world has also changed the job market. There’s more demand for workers who support a digital economy—like delivery drivers, warehouse staff and those with the technical know-how to help companies adopt digital technologies.
But we can’t ignore the challenges associated with this digital transformation:
- companies are struggling to find workers who have these new skills
- some positions—and people—will likely be replaced by technology
Digitalization makes us more resilient
Major recessions can affect potential output—the economy’s ability to produce goods and services without causing inflation to become a worry. That’s because:
- when businesses cancel or delay investments—or close altogether—the economy’s capacity to grow decreases
- when people are unemployed for long periods of time, they find it harder to re-enter the workforce and the economy’s overall productivity lowers—this is called scarring
The pandemic forced many people and companies to adopt digital technologies more quickly than planned. And this helped the economy over the past year. As we move forward, the digital transformation could increase our productivity and growth potential for years to come.
There is no doubt the recession caused by the pandemic, like all recessions, will result in lost capacity and scarring. But the accelerated digital transformation has supported resilience so much that we now think the damage to potential will be less than we earlier feared.”
Our decision yesterday
Global economic activity is picking up, but the recovery is uneven—largely due to differences in COVID-19 infection rates and vaccination efforts around the world. In Canada, the economy is progressing in line with the outlook in our April Monetary Policy Report. We expect a strong rebound this summer led by consumer spending, as restrictions ease and more people get vaccinated. But how new COVID-19 variants may evolve remains uncertain.
With this in mind, we believe our economic recovery continues to require extraordinary support:
- We will keep the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our April projection, this happens sometime in the second half of 2022.
- We will continue our quantitative easing program, maintaining the target pace of $3 billion per week, to reinforce this commitment and keep interest rates low across the yield curve.
Canadians can count on us to continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”