Due to increased optimism about the economic recoveryThe Bank of Canada raised its forecasts for economic output and inflation, but continued to predict that spare economic capacity would not be fully absorbed until the second half of next year.
Central bank policy makers, led by Governor Tiff Macklem, released new economic forecasts on Wednesday, expecting a strong rebound in the second half of the year after a weaker-than-expected start to 2021, mainly due to a rebound in employment levels and households starting to spend the cash they have accumulated over the past year.
However, the Bank of Canada remained rather cautious in its forecasts, insisting that spare capacity in the economy would continue for some time and that the rise in inflation would be temporary. The bank stressed the importance of achieving a "comprehensive and inclusive" economic recovery.
The Bank of Canada predicts that the economy will not be in short supply until 2023.
Key insights
The Bank of Canada's new forecast is in line with market expectations that the interest rate hike cycle will begin in the second half of next year and will need to be raised several times in order to cool the economy, which is likely to overheat in 2023.. The Bank of Canada has promised not to raise borrowing costs until the output gap disappears and inflation continues to return to its target.
The Bank of Canada believes that a more optimistic outlook will boost both demand and potential output as business investment and the labour market recover. This is why the net impact of the bank's forecast on economic relaxation remains unchanged, although the central bank stresses that its forecast for excess capacity is highly uncertain.
Although inflation is forecast to rise significantly in the coming year, the central bank expects consumer price growth to fall back near its target of 2 per cent in 2022, before excess demand will temporarily push it higher in 2023. Inflation is likely to return to target levels by 2024.