Vaccination efforts key to economic recovery, BoC says as it keeps rate on hold

The economy will go in reverse for the first quarter of 2021, the Bank of Canada said on Jan. 20 as it kept its key interest rate on hold, warning the hardest-hit workers will be hammered again on a path to a recovery that rests on the rollout of vaccines.

Workers in high-contact service industries will carry the burden of a new round of lockdowns, which the central bank warned will exacerbate the pandemic’s uneven effects on the labour market.

The longer restrictions remain in place, the more difficult it may be for these workers to find new jobs since the majority move to a new job but in the same industry.

Bank of Canada Governor Tiff Macklem said in his opening remarks at a late-morning news conference that the first-quarter decline could be worse than expected if restrictions are tightened or extended.

The central bank kept its key rate on hold at 0.25 per cent on Jan. 20, citing near-term weakness and the “protracted nature of the recovery” in its reasoning.

The short-term pain is expected to give way to a brighter outlook for the medium-term with vaccines rolling out sooner than the central bank expected.

Still, the bank said in its updated economic outlook, a full recovery from COVID-19 will take some time. Nor does the Bank of Canada see inflation returning to its two per cent target until 2023, one year longer than previously forecast, and the bank’s key rate is likely to stay low until then.

Overall, there is reason to be more optimistic about the economy in the medium-term, but it will still need extraordinary help from governments and the central bank to get there, Macklem said.

The central bank’s lookahead rests on efforts to vaccinate Canadians by the end of the year without any hiccups in that timeline, which would mean broad immunity six months sooner than the bank previously assumed.

“It’s going to be very important that Canada get the vaccines, we get them distributed to Canadians and that Canadians take the vaccine,” Macklem said.

A shorter timeline for vaccinations should mean less scarring overall for the economy in the form of fewer bankruptcies and fewer workers out of jobs for long stretches, which makes it more difficult for them to get back into the labour force.