Canada says pandemic aid has limits as central bank warns of long-slog to recovery

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Economy2 hours ago (Oct 28, 2020 03:05PM ET)

© Reuters. Canada’s Deputy Prime Minister and Minister of Finance Chrystia Freeland takes part in a news conference on Parliament Hill in Ottawa

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) – Canada’s finance minister on Wednesday said for the first time that federal pandemic aid to households and businesses has limits as the Bank of Canada warned of a “long slog” toward a post-pandemic economic recovery.

Chrystia Freeland, speaking at a Toronto economic forum after the central bank announced it expected interest rates to stay at a record low until sometime in 2023, said “there are no blank cheques … no free lunches.”

“Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite. It is limited and temporary,” she added.

But later this year the government will deliver “targeted, carefully thought-out investment – on a meaningful scale”, she said after the central bank, in an update of its economic projections, said a second wave of coronavirus infections would hurt Canada’s near-term growth.

New infections have surged in recent weeks leading to targeted restrictions. The BoC held its key overnight interest rate at 0.25%, as expected.

“If you are a household considering making a major purchase, if you’re a business considering investing, you can be confident that interest rates will be low for a long time,” Governor Tiff Macklem told reporters at a press conference.

While the central bank now expects a smaller economic contraction in Canada in 2020 than previously forecast, it also notched down its growth outlook for 2021. It did not change its outlook for 2022, and it expects economic activity to return to pre-pandemic levels at the start of that year.

“What we’re saying is, ‘We’re going to get through this, but it’s going to be a long slog,'” Macklem said.

The bank noted its projections assume new coronavirus outbreaks will be managed by targeted containment measures, but said the impacts could be more severe than anticipated. Deaths nationally topped 10,000 on Tuesday.

“There is a serious risk … that broader or more intensive restrictions could be required,” it said in its quarterly Monetary Policy Report.

The Bank of Canada said it did not expect the output gap to close until 2023, with rates at their effective lower bound until that economic slack is absorbed, and forecast overall inflation to remain below its 2% target through 2022.

Additionally, the bank reduced its bond-buying program to C$4 billion per week from C$5 billion while tweaking the program toward longer-term bonds.

The bulk of the central bank’s first-ever asset purchase program has been focused on securities that mature in less than two years. Now it will be buying more assets maturing in between three and 15 years, and even some 30-year bonds, Macklem said.

“I think it’s quite clear that they’re driving home the point that the economy will need stimulus, both fiscal and monetary, for quite some time,” said Douglas Porter, chief economist at the Bank of Montreal.

Macklem also clarified previous comments on negative rates, saying the bar “would be very high” and that the idea was not discussed at the bank’s most recent policy talks.

“In the current situation, it’s not something that we think would be very helpful, in fact it could be disruptive,” he said.

The Canadian dollar was trading at 1.3315 to the greenback, or 75.10 U.S. cents, continuing a slide against its U.S. counterpart as investors fretted over rising coronavirus cases.

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