By Michael O’Neill

It’s a Charlie Brown moment.  You know the one- he runs to kick the football being held by Lucy, she pulls the ball away at the last second, and Charlie Brown lands flat on his back, seeing stars.

Today, Bank of Canada (BoC) Governor Tiff Macklem is Lucy and Canadian borrowers are “Charlie Brown.”

Since October 2020, Tiff Macklem and BoC officials have been repeatedly telling all who would listen that Canadian interest rates would remain unchanged until “into 2023.”

At the April 21 BoC monetary policy meeting “into 2023” became “second half of 2022.”

“Good Grief!”   What’s changed since  the March 10 policy statement?

If you live in Ontario, you will say things have gotten worse.  The government issued a province-wide “stay-at home” order, that could see you arrested and fined if you left your residence except for specified purposes (grocery shopping, medical appointment, essential work).  That rule was tightened on April 17 when police officers were empowered to demand identification from anyone not at their residence.  Even the police thought that was a “whack-a-doodle” rule and refused to enforce it.

But not the Ontario Provincial Police (OPP).  They are marching to the government’s orders and have turned provincial borders into “Checkpoint Charlie”

Photo: Checkpoint Charlie, Berlin

They province also banned indoor and outdoor dining, and reduced capacity of the few retail outlets that were permitted to open to just 25%.  They closed all outdoor recreation amenities and non-essential construction sites.

Those harsh measures are going to have a serious impact on the Ontario economy, which accounts for 38.6% of Canada GDP  (as of 2019).

British Columbia (B.C.) is another major area where officials have enacted similar restrictions as Ontario to combat the spread of the coronavirus.  Authorities want to restrict Alberta travellers from entering the province for non-essential reasons.  B.C. contributes 13.4% to GDP.

Alberta’s restrictions are not as harsh as Ontario’s, but will still make a dent in that province’s 15.3% GDP rate.

Things have gotten worse.  This provincial trio is responsible for over two-thirds of Canada’s economy.  If they are suffering it is difficult to find the BoC’s upgraded GDP credible.  The Bank forecasts Canada growth of “around 7.0%” in 2021, compared to 4.5% three months ago.  That is fully 2.0% higher than the International Monetary Fund forecast on March 23.  Bank of Montreal is projecting 6%, and JPMorgan forecast’s 6.2% growth.

Why is the BoC so optimistic?   They attribute the upgrade to improved terms of trade, pent-up consumer demand, higher potential output, and additional fiscal stimulus, while predicting stronger foreign demand, higher commodity prices, and improved business confidence.

The Monetary Policy Report acknowledged risks to their rosy outlook.   “Considerable uncertainty surrounds the medium-term outlook for GDP and potential output.  Many issues remain unclear, including the persistence of changes in consumer preferences, the extent of labour market scarring, the implications of weak investment early in the pandemic and the productivity benefits of faster deployment of new digital technologies”

That begs the question: “if there is considerable uncertainty around the outlook, why was it necessary to essentially pre-announce an interest rate hike for 2022?

In fact, Mr. Macklem repeated again the BOC is outcome driven, in which case why have forward guidance that changes with each whiff of the COVID breeze.

The present optimism is likely a punch in the gut to home buyers and business borrowers.  However, financial markets are forward looking, and Canadian interest rates (bond yields) will have risen long before the BoC makes their announcement. The Bank of Canada’s short term economic outlook is usually hit-and-miss, but FX markets react to their longer term outlook.  The Canadian dollar soared following the BoC announcement.

That’s because the BoC may be the first G-10 central bank to start the inevitable rate hike cycle.  That and “Red Bull” will give the Loonie wings.


If the world unfolds the way the MPR predicts, Canadian importers will smile while exporters frown.  The Canadian dollar is awash in positive developments.

 For starters, The Federal budget, released Monday, forecasts a lower budget deficit than what was estimated last October, while allowing for additional fiscal stimulus.  The US proposed $1.9 trillion stimulus program combined with the previously approved $900 billion program announced in December is fueling robust economic growth.  Canada is America’s largest trading partner and will benefit by default.  The prospect of higher Canadian interest rates will support the Loonie as CAD/US interest rate spreads widen in Canada’s favour and encourage further gains toward the 85 US cent level.

Nevertheless, the third-wave coronavirus outbreak in Canada could make pessimists of the optimists and it will be Tiff Macklem shouting “ Good Grief.”