Bank of Canada sees economic slack absorbed in H2 2022, sooner than expected

The bank now expects Canada's economy will grow 6.5% in 2021

  
Bank of Canada Governor Stephen Poloz walks to a news conference in Ottawa, Ontario, Canada, April 18, 2018.

Bank of Canada Governor Stephen Poloz walks to a news conference in Ottawa, Ontario, Canada, April 18, 2018.

REUTERS/Chris Wattie

OTTAWA- The Bank of Canada sharply hiked its outlook for the Canadian economy on Wednesday and said it expected slack to be absorbed in the second half of 2022, suggesting rates could rise sooner than the previous forecast of sometime in 2023.

The central bank, in its spring Monetary Policy Report, also said the COVID-19 pandemic would be "less detrimental" than expected to the economy's potential output. Last year it slashed its key rate to a record low 0.25%.

The bank now expects Canada's economy will grow 6.5% in 2021, up from its January forecast of 4.0%, with real GDP growth of 3.7% in 2022, down from a previous forecast of 4.8%. It now sees U.S. economic growth this year at 7.0%, up from 5.0%.

"In view of the more favorable economic outlook, the Bank now expects slack will be absorbed and inflation will sustainably return to target some time in the second half of 2022," the Bank said, cautioning that the timing of the projection was more uncertain than usual.

While recent job numbers look positive, it may take considerable time for full employment to return, the bank said. Due to population growth Canada needs to add 475,000 jobs to return to pre-pandemic employment levels.

(Reporting by Julie Gordon and David Ljunggren, Reuters Ottawa bureau; (647) 480 7891, julie.gordon@tr.com)

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