The level of the Canadian key interest rate is justified in light of the current disinflation (-0.2%) April 2020 and low oil prices in 2020. While acknowledging that the impact of coronavirus on the global economy may have peaked, BOC remains cautious about how the recovery could unfold.
Extraordinary measures taken by the Bank of Canada
Like other major central banks, the BOC has taken extreme measures to stimulate the Canadian economy during this coronavirus period. Its balance sheet tripled in 2020 to support the economy and financial system, reaching about 20% of GDP or C$460 billion.
For the second quarter, the OAS estimates that Canada’s GDP will decline by 10-20% compared to the first quarter of 2020, even if the decline is not as sharp as the worst-case scenario set out in the April MPP (Monetary Policy Report).
Commodity prices have a significant impact on the way the BOC conducts its monetary policy. The price of oil, in particular, because the Canadian economy is an energy-intensive economy, and a large part of its workforce is employed in upstream and downstream oil production.
The BOC found that after falling sharply at the beginning of the year, commodity prices recovered, but remained low. Canada has suffered historic production and job losses as a result of the coronavirus outbreak, and targeted fiscal measures, combined with lower interest rates, have helped cushion the shutdown of production. More importantly, the BOC’s decisions and actions aim to lay the groundwork for a gradual economic recovery, which is in the minds of all central banks in the developed world.
In 2020, the Canadian dollar (CAD) was one of the most volatile currencies on the Forex scoreboard. When the price of the WTI futures contract in May was below zero in the second half of April, the DAC experienced one of the worst periods in its history.
As a major oil producer, Canada is a major oil producer, the DAC has a direct relationship with the price of oil—it goes up and down as the oil price moves.
This relationship is both a blessing and a curse for the BOC-the advantage of having a weaker currency to help exports is offset by the fact that the main export products are derived from lower-priced oil.