MNI INTERVIEW: BOC Can Move Now on Ending Reinvestment-CD Howe

The Bank of Canada can end the reinvestment phase of quantitative easing as soon as it raises interest rates, moves that may come at the March 2 decision, former BOC analyst and associate research director at C.D. Howe Institute Jeremy Kronick told MNI.

Investors would benefit from a clearer path on how the Bank will manage its balance sheet from here, and allowing asset roll-off would be a stronger commitment to curbing inflation, he said. Governor Tiff Macklem has said he will continue reinvestment that keeps about CAD380 billion of assets on the Bank's books at least until rates rise, and expects inflation to hold around 5% in the first half of the year.

“They could get away with stopping reinvestment right now,” he said. “If we’re talking about hiking the overnight rate, I don’t see why we would also still be reinvesting,” Kronick said, adding "it wouldn't be a surprise to me" to see that combination next week.

“They should be signaling they are using all of the tools at their disposal to bring inflation back down, and that’s more important than it’s been for a long time just given where inflation is and where expectations might go,” he said, when asked about ending QE reinvestment.

Sticking to asset roll-off as opposed to active sales is safer for financial market stability and also politically as the government runs budget deficits, he said. While pulling back on QE won't have a strong effect on pulling down inflation by itself, the time has come to put the extraordinary tool away, he said.

AVOIDING OVER-TIGHTENING

“Rolling off is the easier way to do it, then the Bank doesn’t have to make any kind of decision on whether to enter markets” with active sales, he said.

The BOC should stick to its main goal of restoring 2% inflation rather than be diverted by debate around returning interest rates to neutral, he said. “Especially with all this debt floating around before and during the pandemic, can we get there without disrupting the economy?” he said. “I don’t think anyone’s interested in engineering a recession.”

The need for quarter-point rate hikes will likely be reassessed at each meeting to see how sensitive the economy is to the tightening, he said, rather than taking a more aggressive or mechanical approach. Governor Macklem has said he sees a "path" of tightening and measured steps to unwind stimulus.

“They are going to keep doing it, but they are going to do it at a slower pace and then assess each time what the impact is,” Kronick said, in comments before a surge in oil prices following the Russian invasion of Ukraine.

Market economists also see the Bank lifting its record low 0.25% policy rate by 25bps on March 2. Rate futures were pricing in a 43-bp rise, while some investors see a chance of a half-point move after Deputy Tim Lane said the Bank could be "forceful" if needed.