BoC must change its tune as economy outperforms, report says

Canada’s stronger-than-expected economic recovery will push the Bank of Canada to start shifting its monetary policy stance sooner than planned, says Scotia Economics.

In a new report, the bank said that the economy is performing much better than the central bank’s forecasts, and is now about 97% of the way back to pre-pandemic levels.

Most sectors have almost reached pre-crisis levels, and the laggards that were hit hardest by the pandemic “are also the ones with potentially the most to gain should behaviour start to respond favourably to vaccinations over 2021 into 2022,” the report said.

“If vaccines combine with imported benefits of massive U.S. fiscal stimulus and further fiscal stimulus in Ottawa’s spring budget then we could very easily shut spare capacity this year — maybe even by summertime — and begin edging into excess aggregate demand.”

The economy is set to close its spare capacity much sooner than the Bank of Canada has projected, which is in keeping with Scotia’s “expectations for earlier rate hikes than the BoC’s 2023 guidance indicates.”

Indeed, Scotia now expects to soon see a shift in the central bank’s tone, noting that it will be “increasingly difficult for [the BoC] to credibly say that we’ll have spare capacity for another three years yet and to do so with a straight face.”

That new outlook from the central bank could materialize as soon as next week, the report noted.

“Major upward forecast revisions are ahead at the BoC and will be present in the April MPR with possible statement guidance next week.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.