The Bank of Canada on Wednesday reiterated its intention to maintain an accommodative monetary policy stance as the economy continues to recover and as financial conditions remain one standard deviation above neutral.
As it has for the past 16 months, the central bank is keeping its policy rate at near zero to maintain liquidity in the commercial markets, while continuing its purchases of long-term securities to pressure interest rates lower and facilitate long-term investment.
In its June meeting statement, the bank noted the increased prospects for growth, but also the need for consistent policy in the face of uneven growth among the global economies and the threat of a resurgent virus.
The bank also noted rising confidence and resilient demand, underscoring an increasingly optimistic outlook. Vaccinations continue to make it easier for Canadians to live normally again, and that has lifted consumer confidence and retail spending.
But the bank noted the threat of further shutdowns and an employment rate that remains well below its pre-pandemic level, “with low wage workers, youth and women continuing to bear the brunt of job losses.”
Nearly two-thirds of Canadians have received one dose of the vaccines, with roughly 9% now fully vaccinated. The number of newly reported daily cases continues to drop and — more important — the retreat of deaths to 32 per day can be attributed to the efficacy of the vaccines.
In addition, consumer gains are being matched by the production sector, where manufacturing new orders are now back to pre-pandemic levels.
The progress in the economy comes within the background of stability in the financial markets created by the Bank of Canada’s policies. The markets have responded accordingly.
The RSM Canada Financial Conditions Index continues to indicate reduced levels of risk being priced into asset prices traded in the commodity, equity, bond and money markets. That sets the stage for long-term investments in the new economy, leading to increased productivity and competitiveness, and higher rates of employment, and spending.
Because central banks have determined that monetary policy is transmitted to the economy via financial conditions, we created the RSM Canada Financial Conditions Index to measure the degree of risk or accommodation priced into financial assets. A value of zero indicates a normal degree of risk priced into financial assets. Values below zero indicate abnormal levels of risk that would tend to limit investment. Values above zero indicate an accommodative environment conducive for investment.
Our composite index has been at least 1.0 standard deviation above neutral over the last nine weeks and is now approaching 1.2 standard deviations. This is particularly significant because much of the recent improvement has been outside the commodity sector, despite the price of WTI crude moving above $70 a barrel. That implies that overall financial conditions are conducive for an economic recovery in the months ahead.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
