The Bank of Canada, to no one’s surprise, left interest rates unchanged. The overnight rate remains at its effective lower bound of 0.25%. In the accompanying communique, the Bank highlighted that it is maintaining its asset purchases (i.e. quantitative easing) programs. The title on the communique was, “Bank of Canada will maintain current level of policy rate until inflation objective is achieved”. This represents the Bank providing forward guidance to help shape interest rate expectations. They are effectively saying that rates will not rise until the slack in the economy is eliminated. We expect this will only occur in late 2022 or perhaps in 2023. Acknowledging the risks to the outlook, the Bank stressed that it is prepared to provide further monetary stimulus as needed.
The Bank also released its Monetary Policy Report (MPR) with updated forecasts for the Canadian economy. The Bank acknowledged the high degree of uncertainty and characterized the forecast as a central scenario where there is an assumption of no second wave of infection. In this scenario, the economy contracts 15% in the first half of this year, but rebounds strongly in the second half before slowing to a gradual recovery in 2021. For the year as a whole, the Canadian economy contracts 7.8% in 2020 but then records 5.1% growth in 2021. The economic weakness keeps inflation below the 2% mid-point policy target this year. Inflation then moves back towards target as the economy recovers.
In other news, Canadian manufacturing sales increased 10.7% in May, which is stronger than the Statistics Canada’s early estimate of 6.2%. Removing the price effects, manufacturing volumes rose 8.8%. Sales were up in 18 of 21 major industries.
The resilience in Canadian real estate continues. Existing home sales soared by 63% in June, putting them only 8.5% below pre-COVID levels. Double-digit gains were experienced in all provinces. Sales have rebounded by more than listings, which supported an average price gain of 8.1% year-over-year. More higher priced homes were sold, so the price gain was a more moderate 5.4% on a unit basis. I am still not convinced that residential real estate markets will maintain their momentum. The unemployment and income shock is still present and I believe it will cool the market after the initial rebound. I am not expecting a significant correction, but home sales and prices could pull back in the Fall as the lingering economic fallout is eventually felt and as government support programs are scaled back or ended.