Economic Effects of Pandemic Could Linger: Canada’s Monetary Policy Outlook to 2045

The Conference Board of Canada, 14 pages, November 25, 2021
Issue Briefing
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This annual economic forecast presents Canada's long-term monetary policy outlook.

Document Highlights

  • The current bout of high inflation will fade over the next two years, with price growth eventually settling in at the Bank of Canada’s 2.0 per cent target over the long term. There is, however, a risk that some of the current problems in global supply chains and labour markets could persist through 2045.
  • Interest rates will start to increase gradually in the second half of 2022, as the economy will have recovered enough to convince monetary authorities that it can handle higher rates. Over the long term, short-term interest rates will settle at around 1.75 per cent, while yields on longer-maturing bonds will be close to 3.0 per cent.
  • The low interest rates will be due to an economy expanding at a pace below 2.0 per cent per year through 2045 as the aging of the population restrains growth in the labour force.
  • The Canadian dollar is currently trading in US$0.80 territory, but it will slowly depreciate over the long term. We expect interest rates to be slightly higher in the United States than in Canada. Although, world oil prices will be above US$80 per barrel in the 2040s, oil prices will decline somewhat in real terms over the long term. Consequently, we expect the loonie to average somewhere in the US$0.76–0.77 range.
  • Historically, real interest rates tend to stay low for a few decades following major pandemics. This will likely occur post-COVID-19, although there will be some upward pressure on real rates due to high government debt levels that lead to lower savings.

Table of Contents

Key Findings
Overview
Will Inflation Stay Down?
Loonie Won’t Stay Above US$0.80
Real Interest Rates on a Roller-Coaster Ride
Pandemics’ Effects Can Drag on for Centuries
Methodology

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