New Governor of the Bank of Canada on Monetary Policy in the Context of COVID

The new Governor of the Bank of Canada Tiff Macklem spoke about “Monetary Policy in the Context of COVID” in a videoconference hosted by the Canadian Clubs. He described a far more cautious economic outlook than the one presented by his predecessor.

After strong job growth and a boost in spending from pent-up demand, he expected the recovery to be “long and bumpy, with the potential for setbacks along the way”. In his opinion, not every job would come back, and the recuperation phase would likely be characterized by weak demand.

One of the more interesting takeaways from his speech came from his characterization of the Bank’s monetary policy position. While the stance on negative interest rates remained the same (“We feel that bringing that rate into negative territory could lead to distortions in the behaviour of financial institutions.”) , the description of asset purchases took a significant turn.

Macklem conceded that, as market functioning had largely returned to Canada’s financial markets, restoring it was no longer the Bank’s objective. Rather, asset purchases were now aimed at providing additional monetary stimulus. Macklem even used the terms “quantitative easing” and “credit easing” to characterize the Bank’s purchases—terms that his predecessor Stephen Poloz had shied away from. And while explicit forward guidance was not adopted, Macklem explained that QE could act as a signal that the policy rate was “likely to remain low for a long period”.

Macklem took two rounds of questioning after delivering his speech—one from the audience and one from the media. Regarding the monetary policy response, he said that there were seven C’s to crisis management. One stood for “crush it”, which meant going beyond the “normal” response to address the rapid deterioration in economic activity/confidence. Another stood for “cooperation” between central banks, governments and regulators.

Concerning the energy sector, he acknowledged that oil producers had already been reeling before the crisis and that they now faced a particularly difficult situation. “There is no doubt the pandemic is going to have an ongoing effect on oil prices,” he remarked. Macklem was less pessimistic about already elevated Canadian household debt levels and pointed out that lower spending and significant government assistance had led to a higher saving rate and some modest deleveraging. He expected sound macroprudential measures would limit unsustainable spikes in indebtedness, as needed.

Offering a preview of what could be expected at the next BoC meeting, the Governor said that the July edition of the Monetary Policy Report would probably provide a central planning scenario for output and inflation and a discussion of the related risks. Going forward, Macklem said that policymakers would assess incoming information relative to the scenario.

Source: By Jocelyn Paquet et al, National Bank of Canada Economics