Bank of Canada says pandemic second wave to hit near term growth, holds rates steady

OTTAWA: Canada's initial rebound from the pandemic-linked economic crisis was stronger than expected, but the second wave is poised to cause a "more pronounced" near-term slowing, the Bank of Canada said on Wednesday, as it again held its key interest rate steady.

The central bank also said it was recalibrating its major asset purchase program to shift towards longer-term bonds, which it says have more direct influence on borrowing rates that are most important for households and businesses.

The Bank of Canada now expects a smaller contraction in Canada in 2020, compared with its July update, followed by slower than previously forecast economic growth in 2021. It did not change its growth outlook for 2022, with economic activity set to return to pre-pandemic levels at the start of that year.

The central bank noted its projections assume new outbreaks will be managed by local and targeted containment measures, but said the impacts could be more severe than anticipated.

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

Going forward, the Bank of Canada said it expects quarterly growth patterns to be "unusually choppy" due to localized outbreaks and containment measures, along with varied rates of recovery across industries.

The bank also said it did not expect the output gap to close until 2023. It forecast overall inflation to remain below its 2% target through 2022.

The Bank of Canada says it now sees the Canadian economy contracting by 5.7% in 2020, then growing 4.2% in 2021 and 3.7% in 2022.

The Canadian dollar was trading at 1.3290 to the greenback, or 75.24 US cents, continuing a slide against its US counterpart as investors fretted over rising coronavirus cases.