MNI: BOC Says QE Was Worth The Risk But High Bar For A Repeat

The Bank of Canada again defended QE criticized by the leading candidate to win next year's federal election, saying it was worth the risk during the pandemic to stave off deflation and mass unemployment, while adding a full review will be published early next year and the bar for using balance-sheet expansion again is high. 

"The Bank took a risk management approach to decision-making. We considered alternative futures and thought about the consequences of making policy errors. Governing Council then chose a policy course that accounted for those risks," Deputy Governor Sharon Kozicki said in the text of a speech she's giving Thursday in Ottawa. 

The Bank's use of QE helped lower borrowing costs for households and businesses after the policy rate was cut to about zero, she said. Staff research suggests it helped lower 10-year government bond yields by at least 20bps -- less than a conventional rate cut -- and boosted GDP by 0.5%. Balance-sheet expansion added to the weight of other extraordinary monetary and fiscal policies such as the pledge to hold interest rates near zero for a while. 

Canada avoided QE deployed by other major central banks before the pandemic and the shift to QT ahead of many peers has gone smoothly and remains on track to end sometime next year, Kozicki said. The Bank's quarter-point interest rate cut last week can be followed by more reductions if inflation continues moving back to the 2% target, she said, reiterating the theme of that earlier decision.

Conservative Party Leader Pierre Poilievre has said he will fire Governor Tiff Macklem after attacking the Bank's QE policies, saying that enabled reckless government deficits that drove inflation to 8%. The NDP has also said the Bank held rates high for too long and risked a needless recession. Governing Liberals have defended the Bank's independence, while saying in advance of the first interest-rate cut the conditions were coming into place for that to happen. 

"Questions will continue to be asked that may shape if and how we use our exceptional tools in the future. These questions are particularly valuable in a world where the next crisis may look different from those in the past," Kozicki said. 

Her remarks pushed back on arguments by some economists that part of the reason officials missed the inflation surge was ignoring the money supply jump that came alongside extraordinary stimulus. "I’m not going to pretend that we got everything right in our pandemic response, but the evidence suggests that the run up in inflation that started in 2021 was mainly driven by supply-side issues, including commodity price swings and supply disruptions. When we look at the last three decades, we see very little correlation between money growth and inflation," she said.

The Bank's balance sheet grew to CAD575 billion from CAD125 billion during the pandemic including almost half the stock of federal government bonds. The central bank is also booking unprecedented losses tied to its QE program that required the government to amend the Bank’s legislation to facilitate the accounting.