MNI POLICY: BOC Scales Back Asset Buying, Holds 0.25% Rate

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada is scaling back asset purchases to

stabilize markets as the focus shifts to supporting the economic recovery

through Covid-19, while holding the key lending rate at 0.25% Wednesday as Tiff

Macklem took over from Governor Stephen Poloz.

     Term repo purchases will be scaled back to once per week from twice, and

buying bankers' acceptance contracts will be reduced to bi-weekly from weekly,

the central bank said from Ottawa. 

     "As market function improves and containment restrictions ease, the Bank's

focus will shift to supporting the resumption of growth in output and

employment," according to the decision that was endorsed by Macklem, who

observed the meeting. "The Bank maintains its commitment to continue large-scale

asset purchases until the economic recovery is well underway."

     Global economic damage from Covid-19 appears to have peaked since the last

decision April 15, the BOC said, and Canada's economy should return to growth in

the third quarter. The central bank scaled back its "scenario" for the decline

in total GDP, estimating it fell 2.1% in Q1 and 10%-20% in Q2, versus prior

ranges of 1%-3% and 15%-30%.

     --MACKLEM READIES FOR JULY MEET

     The BOC rate decisions are traditionally written on Tuesday -- in this case

Poloz's last day before retiring -- based on briefings that began more than two

weeks beforehand. Macklem started his own seven-year term Wednesday, and has a

bigger chance to make a mark at the July 15 meeting that comes with a much

longer Monetary Policy Report and a press conference. 

     The BOC said Wednesday the July decision will contain "full update of the

Bank's outlook for the economy and inflation, including risks to the

projection."

     Macklem inherits plans to buy at least CAD5 billion a week in federal

government bonds until the recovery is well underway. Those purchases along with

corporate repos have swelled the balance sheet to a record CAD464 billion or 20%

of first-quarter GDP annualized. The BOC has also moved into uncharted waters

with plans to buy up to CAD50 billion of provincial government debt and CAD10

billion of corporate bonds.

     Major asset purchases may continue with Prime Minister Justin Trudeau's

government pushing a deficit to CAD260 billion or 15% of GDP to stem the damage

from Covid-19. Canada's GDP may contract at a 40% annualized pace this quarter

and unemployment this week may approach a modern day record of 15%.

     Macklem said when he took the job he agrees with Poloz's aggressive asset

purchases in a crisis and with Poloz's view that negative interest rates could

backfire. Wednesday's statement said 0.25% is "the effective lower bound,"

making it harder for Macklem to change course to negative rates. 

     --INFLATION DRIFTS DOWN

     The BOC's mandate to keep inflation at 2% is being tested by plunging

demand and energy prices, with CPI down 0.2% in April from a year ago, the

weakest since 2009.

     "Any further policy actions would be calibrated to provide the necessary

degree of monetary policy accommodation required to achieve the inflation

target," the BOC said. 

     "The Bank expects temporary factors to keep CPI inflation below the target

band in the near term. The Bank's core measures of inflation have drifted down,

although by much less than the CPI, and are now between 1.6 and 2 percent."

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

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