MNI POLICY: BOC May Dial Back QE if Vaccination Goes Faster

Bank of Canada Deputy Governor Paul Beaudry hinted Thursday that progress on Covid-19 vaccines could hasten a winding down of QE if the economy rebounds faster than policy makers expected.

"The faster people get vaccinated and more people get back to work in contact-sensitive sectors, the more quickly the recovery could unfold," Beaudry said in the text of a speech. "In that context, we may need to re-examine the amount of stimulus needed to achieve our inflation target. Earlier in my speech, I illustrated how we could withdraw stimulus from our QE program when the time comes."

The BOC on Wednesday affirmed it will continue QE of at least CAD4 billion a week until the recovery is well underway and that it saw no rise in the 0.25% policy rate until into 2023 when inflation could return sustainably to a 2% target. Just after that announcement Canada approved its first Covid-19 vaccine, something sources told MNI will likely lead the BOC to pull forward its October assumption a vaccine wouldn't be widely available until mid-2022.

"Going forward, both downside and upside risks to inflation are in play," Beaudry said. "For the Bank, that means being prepared to respond in either direction." That language compares with Governor Tiff Macklem's Nov. 26 testimony at Parliament that while risks are roughly balanced, "we are particularly focused on the downside" with interest rates and inflation so low.

PATHS TO EXIT

The near-term outlook in Canada and abroad remains weak because of the second wave of the virus, Beaudry said, something that will hurt growth in the first quarter of 2021.

"Looking further out, the picture is more reassuring—recent positive news on vaccines represents an upside risk to the outlook, although uncertainty remains around how they will be rolled out, in Canada and globally," Beaudry said.

The BOC when needed can pare back the pace of QE, and has already scaled it back from the original pace of CAD5 billion, Beaudry said. After that policy makers can choose to re-invest the proceeds of the assets the cetral bank still holds, allow maturing assets to roll off the balance sheet, or take the more aggressive step of selling its holdings back into the market.

"Several central banks that used QE during the global financial crisis focused on the first two options, in a careful sequence," he said. "Our choice between the different options would depend on our outlook for the evolution of inflation."

Beaudry also defended QE against opposition lawmaker accusations the central bank is being used to backstop cheap deficit financing, saying the benefits flow through to all Canadians and will support the economic rebound.