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Bearish Risk

MNI INTERVIEW: BOC Taper Easier Than Full Asset Exit: Perrault

OTTAWA (MNI)

Former BOC official says rebound has solid foundation for taper this year

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The Bank of Canada will taper QE again after the second pandemic wave passes, while failing to fully slim down the balance sheet even as the economy is restored later on, former central bank official and Scotiabank chief economist Jean-Francois Perrault told MNI.

Governor Tiff Macklem's statement Wednesday he could slow asset purchases if growth is stronger than expected was a nod to how the program was intended to work all along, not a radical policy shift, Perrault said. The BOC isn't primed for a sudden tapering from the current pace of at least CAD4 billion a week at the next meeting, given much of nation is still in lockdown, Perrault said.

"We need to put a little more distance between the virus and policy actions," said Perrault, former assistant deputy minister at the finance department and assistant chief at the BOC's domestic analysis branch. "You want to wait a few months before you start to say we are going to rethink our policy stance," he said about the pace of QE. "I'm sure something will happen sometime in the year."

The Fed when it scaled back QE after the 2008 crisis shifted to slowing purchases and then letting maturing assets roll off the books, a path the BOC will likely follow, Perrault said.

SWOLLEN BALANCE SHEET

That implies a long time will be needed to shrink down the BOC's balance sheet even after an October taper from CAD5 billion a week. Since that move, the BOC has also bought longer-term assets and the portfolio's weighted maturity has lengthened to seven years from six years. Other major central banks have failed to fully unwind emergency policies deployed during the 2008 financial crisis, some of which Canada avoided until Covid-19.

"The QE unwind will almost certainly involve a significant measure of 'we're just going to let things roll off,' as opposed to outright selling," Perrault said.

The BOC's balance sheet swelled to a record of about CAD550 billion through the pandemic from CAD125 billion beforehand. Some CAD140 billion of balance sheet assets will come due in the next three months, mostly t-bills and repos, which the BOC said may trim the balance sheet.

Sources have told MNI the BOC may wind up QE purchases by mid-2022, in a poll taken before Wednesday's rate decision. The BOC has said QE will continue until the recovery is well underway.

STRONGER ITERATIONS

Governor Macklem showed more optimism about medium-term growth in his latest decision, and his view of slack being used up in 2023 is now likely the very latest that goal will be reached, Perrault said.

The domestic economy stands to gain from consumer spending and U.S. growth that could hit 7% this year on fresh fiscal stimulus, he said. America's fiscal boost would spark demand from the buyer of three-quarters of Canada's exports.

"Fundamental underpinnings of the recovery are quite solid," Perrault said. "There is potential for things to be even stronger in future iterations" of the BOC's economic forecasts, he said.

Macklem told reporters after the rate decision that while he could slow asset purchases if the economy does well, "we expect a protracted recovery, this is going to take some time."