MNI EXCLUSIVE: New BOC Gov Has QE, New Forecasts on To-Do List

By Greg Quinn

     OTTAWA (MNI) - Newly inaugurated Bank of Canada chief Tiff Macklem will

advance record balance sheet expansion and avoid forward guidance for now,

former officials told MNI, adding that in the long run he may also lead the bank

to embrace average inflation targeting.

     Macklem started his seven-year term last week by endorsing outgoing

Governor Stephen Poloz's plan to buy assets including at least CAD5 billion a

week in federal bonds until the recovery is well underway. That's already

quadrupled the balance sheet to CAD480 billion or 21% of Q1 GDP annualized since

early March to ease the blow of Covid-19.

     "The bank's balance sheet will continue to increase at a significant pace

in the weeks ahead," former BOC researcher and Laurentian Bank Securities chief

economist Sebastien Lavoie said in an interview. Asset purchases are more

meaningful now than forward guidance tied to economic variables that are

unpredictable through the shock of the pandemic, he said. 

     Deeper changes may come next year when the 2% inflation target is up for

renewal, and Macklem may follow the Fed if U.S. officials adopt an inflation

make-up strategy, Lavoie said.

     --INFLATION FRAMEWORK

     Average inflation targeting "could be more transparent or part of a clearer

mandate at the Fed, so it's something the Bank of Canada may consider," Lavoie

said. The BOC won't go first because "it will be tough for me to imagine Canada

going in a different direction than its main trading partner, because it could

be bring some volatility effect on the FX side," he said.

     Philip Cross, Statistics Canada's former chief economic analyst now at the

Macdonald-Laurier Institute, says the target likely won't change because it

would rattle Canadians already coping with a recession. 

     Averaging inflation only works if "you think you are going to miss your

target for an extended period of time" and are certain the message instills

confidence, Cross said.

     --FORECAST RETURNS

     Cross agreed with Lavoie that more asset purchases are needed to bring the

economy through the health shutdowns. "The only solution in the short term is to

mail out checks to people, and that is going to require debt," Cross said.

Canada is heading for a record CAD260 billion budget deficit, 15% of GDP.

     The BOC has scaled back purchases of term repos and bankers' acceptance

contracts as some market tensions eased and "we will see other tweaks along the

way," Lavoie said. "It's a somewhat deliberately vague forward guidance because

you don't really know at the end of the day what kind of securities you will

need to buy if there is distress or a second wave of the virus."

     Macklem will give a strong clue on how long QE lasts at the July 15 meeting

when the BOC restores economic forecasts it dropped in April. At his appointment

announcement in May, Macklem told reporters the economy won't "snap back to

normal, it's going to be a phased approach, where this virus is going to be out

there for some time." That's less sanguine than Poloz's argument around the same

time that pessimism is overblown.

     What won't change for a while is the 0.25% policy rate. Macklem told

reporters it's the lower bound and going negative could destabilize markets.

Some economists say an increase won't be needed through next year.

     --EXIT STRATEGY

     Macklem's toughest task may be the balance sheet exit strategy, and Lavoie

said the challenge is avoiding a Fed-style taper tantrum. Government debt

purchases also raise the potential for political conflict, and the economy faces

wildly different ways out of quarantine.

     There's no clear record of Macklem's leanings from his past work as the

BOC's No. 2 because decisions are made by consensus and his speeches followed

the same joint outlook. He also gave few clues while working at the finance

department or for a longer exit leading the University of Toronto's business

school. 

     Lavoie worked with Macklem at the BOC and said his approach is very

rational and practical and to seek a diverse range of views. Cross said the

strength of BOC staff points to Macklem only being able to make a few big

changes to BOC policy over his term.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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