MNI POLICY: BOC Has Lots of Room to Boost QE if Needed

Bank of Canada Governor Tiff Macklem said Thursday he has plenty of scope to expand QE if the economy requires, and other options such as yield curve control and perhaps a slight reduction of the 0.25% policy interest rate.

Macklem's opening remarks to the House of Commons Finance Committee affirmed QE will continue until the recovery is well underway. The key lending rate won't rise from near zero before into 2023, since inflation will also lag the 2% target over that horizon.

Risks to the outlook are "roughly balanced" but policymakers are paying attention to the downside amid progress towards a Covid vaccine, Macklem said in opening remarks. He also said in response to a question that asset purchases -- recently lowered to at least CAD4 billion a week from CAD5 billion -- would likely wind down before inflation reached 2%, and he's prepared to boost stimulus again if needed.

"There's ample potential to scale up our quantitative easing, if that were needed," he said.

OTHER OPTIONS

"There are other types of programs that central banks have used, things like yield curve control; we could potentially lower the effective lower bound, even without going negative, at 25 basis points it could be a little bit lower," he said. "Negative interest rates are in our toolkit although that is not something we are actively discussing and we don't think it would be terribly helpful at this time."

Opposition lawmakers asked if the BOC's government bond purchases will come to disrupt the market, and Macklem said the 30% of issues held by the central bank are well below danger zones laid out by other central banks of between 50% to 70%. "We have quite a lot of room and something in that range would start to get uncomfortable, but we have a long way to go to get there," Macklem said.

The economy has moved into a slower recuperation phase after a burst following the end of a spring lockdown, Macklem said, mostly sticking the central bank's October forecast. The economy will remain below potential into 2023, he said.

"We want to be very clear -- Canadians can be confident that borrowing costs are going to remain very low for a long time," he said.