MNI POLICY: BOC: Can Boost QE Or Hike Rate to Meet CPI Goals

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada Deputy Governor Toni Gravelle said Thursday

policymakers will expand asset purchases if needed to fend off deflation, and

can also check any surge in prices by raising interest rates no matter how big

the balance sheet gets.

     Speaking one day after Tiff Macklem took over as BOC governor from Stephen

Poloz, Gravelle also affirmed Macklem's earlier comments that the 0.25% policy

rate is as low as it can go before it would destabilize markets. That leaves

further expansion of the balance sheet, already at about CAD460 billion compared

to CAD120 billion in early March, as the focus of the recovery from Covid-19.

     "In this environment, we are more concerned with low inflation -- and

potentially deflation -- given the depth of the economic downturn," Gravelle

said. "I want to make it clear that we still have our policy rate at our

disposal if inflation were to heat up. It can be raised to influence borrowing

costs, credit growth and economic activity, regardless of the size of our

balance sheet."

     "The Bank is prepared to augment the scale of any of its programs if needed

to support market functioning," he said. "If further monetary stimulus is

required to meet our inflation target, the Bank has tools available to deliver

that stimulus," he said, without elaborating.

     --MORE HOPEFUL RECOVERY

     The BOC on Wednesday scaled back programs to finance term repos and buy

bankers' acceptance contracts to unclog markets, citing improvements in those

markets, while affirming the plan to buy at least CAD5 billion a week in federal

bonds until the recovery is well underway. That makes it easier for Prime

Minister Justin Trudeau to finance a deficit headed for a record 15% of GDP to

fund government relief checks.

     Those payouts, a resilient financial system and signs that laid-off workers

will be hired back when health-related restrictions ease point to a more hopeful

recovery, Gravelle said. 

     Policymakers this week "saw some reasons to be hopeful that the worst can

be avoided," Gravelle said. "A gradual reopening of the economy is starting in

most areas of the country. Spending on cars and houses has picked up, and

measures of consumer confidence have increased from the low levels recorded last

month."

     Other speech highlights:

     - "It's not new for central banks to expand their balance sheets to satisfy

an increased need for liquidity. In fact, this is a key reason why central banks

were established -- to be a lender of last resort, providing liquidity across

the economy."

     - "We know the reopening process is going to be long and uneven, and there

could easily be setbacks."

     - "The last Labour Force Survey from Statistics Canada shows that 43% of

people who have lost their job since February said they expected to return to

it. This suggests that many of these people may be back to work as the

containment measures are lifted, although this is by no means assured. By

comparison, only 15% of Canadians who lost their job during the global financial

crisis said they expected to return to the same one."

     - "We will be paying close attention to how the pandemic is affecting

growth and demand in key markets for Canadian exports."

     -- Policy makers will be looking for signs of permanent damage like job

losses and business closures, and changes in spending and saving habits.

     -- Gravelle reiterated the key line from Wednesday's policy decision: "As

market function improves and containment measures ease, the Bank's focus will

shift to supporting the resumption of growth in output and employment. The Bank

maintains its commitment to continue large-scale asset purchases until the

economic recovery is well underway. Any further policy actions would be

calibrated to provide the necessary degree of monetary policy accommodation

required to achieve the inflation target."

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

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