MNI POLICY: BOC:Oil Slump May Outlast Covid as Drag On Economy

By Greg Quinn

     OTTAWA (MNI) - Low crude oil prices may outlast Covid-19 as a drag on

Canada's economic recovery and it's best to keep actions in place that

"overwhelm" those shocks, new central bank chief Tiff Macklem said Monday.

     The economy faces some permanent damage and a long recovery from the

pandemic, and people shouldn't be misled by any burst of spending that follows

the easing of health shutdowns, Governor Tiff Macklem said after a speech. 

     "For Canada, it's a double whammy," he said of Covid-19 and oil prices. 

     "There is no doubt that the pandemic is going to have an ongoing effect on

oil prices, and in fact the weakness in oil prices could last longer than the

pandemic," he said.

     QE including at least CAD5 billion a week in federal bond purchases is

working to keep yields low across the curve, Macklem said, and will remain in

place until the recovery is well underway. He downplayed other tools by saying

negative rates would be disruptive and giving short references to yield curve

control and forward guidance without giving any scenario where they would come

into play. 

     --CRUSH THE CRISIS

     The Governor said he's willing to expand QE as needed and said his main

principle of getting through the unprecedented drop in output is to "crush" the

crisis. "You need to step beyond the normal responses and really embrace the

idea that you need to overwhelm this crisis, and I think in Canada, both the

government and the Bank of Canada, have really embraced that."

     BOC balance sheet assets reached a record CAD509 billion last week, about

21% of Q1 GDP. The plan to buy federal bonds suggests it may grow by hundreds of

billions more. That makes it easier for the government to finance a deficit

heading towards CAD260 billion to pay relief checks and backstop corporate

loans. 

     Canada also faces risks from indebted consumers, but the risks for now are

being blunted by government income supports, Macklem said. 

     The governor also gave a little more detail on how the July 15 rate

decision will restore some of the quarterly forecasts that were dropped in

April. "It's going to look a lot like a forecast" but must account for greater

uncertainty, he said. The "central projection" and risks around it won't include

a second wave of Covid-19.

     --SLOW RECOVERY

     In the earlier speech, Macklem said the economy faces an inconsistent

recovery from Covid-19, though growth will return in Q3, and the BOC's big job

is avoiding a slide in prices. Some industries "won't reopen until we have a

vaccine or at least very effective anti-viral medications."

     He also said QE "can also send a signal that our policy interest rate is

likely to remain low for a long period." Economists already predict the policy

interest rate will remain at 0.25% through next year.

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

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