MNI INTERVIEW: BOC to Restore CPI Forecast in July-Ex-Adviser

--BOC Will Restore Inflation Forecast At July Meeting-Former Researcher Smith

--Forecast Will Stress Commitment To Mandate

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada will return to forecasting inflation at

its July policy meeting, to stress its message that record asset purchases are

consistent with a price-targeting mandate, a former BOC research fellow told

MNI.

     The outlook will also be clearer then, allowing staff economists to rejig

models and account for changes in how different industries set prices amid

Covid-19, said Gregor Smith, a BOC fellow from 2006-15.

     Governor Stephen Poloz unexpectedly dropped inflation forecasts at the Apr.

15 decision that came with the BOC's flagship quarterly economic forecast paper,

leaving no detailed path to bring prices to a 2% target as set out under an

agreement with the government. Instead officials laid out scenarios around

recovery from the pandemic and said prices would likely stall this quarter, and

a chart showed a downside risk of prices falling.

     Tiff Macklem takes over as Governor for the next meeting on June 3, though

as that is one of four annual decisions limited to a one-page statement instead

of a full a Monetary Policy Report, it is more likely the BOC will wait until

the Jul. 15 decision with the next MPR before providing fresh inflation

forecasts, Smith said.

     "That would be the natural place for it to appear" said Smith, a Queen's

University professor who has also done research for the Atlanta Fed. "I would

imagine they would say something about different inflation measures on Jul. 15,

I would be amazed if they didn't." The BOC may choose to highlight price

measures beyond the consumer price index to better show inflation trends, he

said.

     Policy makers have stressed that asset purchases worth CAD384 billion so

far -- about 15% of GDP -- are in line with the BOC's mandate to keep inflation

at 2%, and that the dominant risk is that an economy in lockdown will send

prices tumbling.

     --LOWER BOUND

     Poloz cut benchmark interest rates to 0.25% and ruled out going negative,

and Macklem has also said such a move could create new financial instability.

The BOC has also declined to offer forward guidance on lending rates.

     "They could do forward guidance, I suppose, but normally that's designed to

influence long-term interest rates," Smith said. "Rates at least in the

government of Canada long-term market are already extraordinarily low, so that

doesn't seem to be a big part of the toolkit."

     After Macklem settles in, the BOC may revisit whether 0.25% is really the

lower bound, Smith said. The BOC before the pandemic said the limit was around

-0.5%, and European central banks have used tiered deposit rates to mitigate the

effect of below-zero levels on banks' net interest margins.

     "What makes that the effective lower bound?" Smith said of 0.25%. "I would

expect them to say a bit more about that at some point," he said, adding that he

is not advocating negative rates.

     The BOC will recalibrate asset purchases based on market signals, Smith

said, because most other tools have been used already. The BOC may also shift

the intent of its asset purchases from market stability to propping up the

recovery.

     "I would expect them to monitor that wide range of markets and be ready to

re-intervene if spreads rise or liquidity falls over the next number of months,"

he said. "They could at some point think we need even more monetary stimulus, so

more quantitative easing."

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

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