Bank of Canada sees 'bumpy' recovery from pandemic

OTTAWA: Canada's economic recovery from COVID-19 will be bumpy, and the pandemic is likely to inflict some lasting damage to supply and demand, Tiff Macklem said on Monday in his first speech as governor of the Bank of Canada.

He reiterated that the bank's policy rate of 0.25% is at its effective lower bound, adding the central bank feels moving rates into negative territory could distort the behavior of financial institutions.

"The pandemic is likely to inflict some lasting damage to demand and supply. The recovery will likely be prolonged and bumpy, with the potential for setbacks along the way," Macklem told a business audience.

The Bank of Canada expects that as businesses reopen from coronavirus closures, supply will likely be restored more quickly than demand, which could lead to a large gap between the two and put "a lot of downward pressure on inflation," he said.

"Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work," Macklem said, adding that the Bank's 2% inflation target remains its beacon.

On supply and demand, Macklem said that reopenings will happen unevenly across Canada and around the world, which will disrupt supply chains and affect both the volume and prices of Canadian exports.

Some industries will not reopen until there is a vaccine or effective anti-viral medications, he said, which suggests the economy's productive capacity will take a hit that will persist even after containment measures are lifted.

The Canadian dollar held onto earlier gains at 1.3550 to the greenback, or 73.80 US cents.

Money markets do not expect further rate moves this year, with some investors betting the Bank of Canada could be among the first major central banks to hike interest rates as the COVID-19 pandemic winds down.