MNI INTERVIEW: BOC May End QE Purchases by Midyear-Ex Official

The Bank of Canada will probably taper QE again in April and could stop making purchases altogether by mid-year as the economic rebound firms up, former central bank and finance department economist Charles St-Arnaud told MNI.

Economic weakness has been widely varied across industries, suggesting fiscal policy is a better remedy than aggressive monetary stimulus, said St-Arnaud, now chief economist at Credit Union Central Alberta. Canada last year began with at least CAD5 billion a week of QE and scaled it back to at least CAD4 billion a week, and April is a good time to taper again as more evidence of progress on a vaccine and stores re-opening appears, he said.

"Stopping the purchases doesn't necessarily remove stimulus," he said. "By the end of the year, QE is done, and they stop buying. I wouldn't be surprised actually if they stopped buying bonds by the summer."

Governor Tiff Macklem last month said vaccine distribution makes medium-term growth more secure, and that if the expansion matches or beats the central bank's forecast, QE could be adjusted further. The central bank has also said it will keep QE until the recovery is "well underway" and the economy may not return to potential until into 2023.

NOT SUPER COMFORTABLE

Macklem last year told lawmakers the BOC remains a long way from owning half or more of the federal government bond market or reaching a point where the central bank's imprint may be a hinderance.

St-Arnaud suggested internal discomfort may be greater than policy makers are letting on.

"They are starting to feel a bit uncomfortable that they are taking too much of a role" in the bond market, he said.

Fiscal stimulus will also become stronger later this year as more people are allowed to visit stores, and the easing of the pandemic stabilizes the economy and job security, St-Arnaud said. Paring back QE will also help avoid any perception the central bank is monetizing deficits, he said.

Canada's fiscal stimulus leads major economies at 20% of GDP according to IMF figures. Finance Minister Chrystia Freeland plans up to another CAD100 billion of measures over several years to boost the economy further.

Fiscal policy "will continue to be very proactive, so as a central bank do you need to continue to be aggressively providing stimulus?" said St-Arnaud.