MNI INTERVIEW: Rebound Justifies Further BOC Taper-Ex Official

Canada's economy will deliver the jobs and GDP rebound needed for the central bank to taper QE again in July, former central bank and finance department economist Charles St-Arnaud told MNI.

That's true even when factoring in the setback around April when provinces went back into stricter Covid lockdowns, which are now being lifted anyway, said St-Arnaud.

"It's clear that it's only temporary," he said of the slowdown. "As provinces re-open in June and July we recover very quickly."

The BOC on Wednesday held a record low 0.25% policy rate and continued CAD3 billion a week of federal bond purchases, while highlighting a strong economic rebound and saying decisions on QE depend on the "the strength and durability" of the recovery.

EXTREME HONESTY

The evidence so far is the economy has shifted into a phase where companies are struggling to keep up with demand, said St-Arnaud, now chief economist at Credit Union Central Alberta.

The full recovery won't be complete until face-to-face commerce and shopping are restored, he said. Canada lagged the U.S. and U.K. on vaccinations earlier this year but in recent weeks has done better by some measures. The economic backdrop for Canada makes it reasonable for Governor Tiff Macklem to offer up comments about unwinding emergency tools, St-Arnaud said.

"In some ways the Bank of Canada has been extremely honest and saying what it thinks. Once the economy recovers, does it make sense to keep doing QE and keeping the rate at the lower bound?"

More candor could arrive Thursday with a speech at 1pm EST by Deputy Governor Tim Lane, which is followed by a press conference. One question likely to come up is why Wednesday's statement didn't say more about a Canadian dollar that has touched the highest since 2015 even as many economists see the U.S. growing faster this year on massive fiscal stimulus.

SLOWER RATE-INCREASE PATH

The Canadian dollar's gains come amid a surge in prices for exported commodities, but even if some manufacturers are hurt there are offsets because the currency is boosting the purchasing power of other firms and households, St-Arnaud said. Broad-based weakness in the U.S. dollar earlier this year is another sign Canada's currency gain hasn't been out of line, he said.

The BOC in the near term doesn't seem poised to again advance its guidance for the policy interest rate to remain on hold until the second half of 2022. That may require the jobless rate falling to around 6% from May's 8.2% rate, and that will take until the middle of next year, St-Arnaud said.

"We have come quite far," already, he said. "Even if they were to gradually increase to 1%, 1% would still be stimulative."