MNI POLICY: BOC's Macklem Sees "Deep Hole" After Upbeat Poloz

--New Governor Signals More QE, Won't Restore Forecasts Like Fed

By Greg Quinn

     OTTAWA (MNI) - Although Canada's economy likely bottomed out in recent

weeks, it remains in a "deep hole", Bank of Canada Governor Tiff Macklem told

lawmakers Tuesday, but said the central bank had plenty of room to expand asset

purchases if necessary.

     Asked by a member of the House of Commons Finance Committee if he shares

Stephen Poloz's view that GDP can quickly regain ground and move further ahead,

Macklem was more restrained and said his optimism is more around the idea the

economy hit bottom in recent weeks and should grow in the third quarter.

     "But I would stress that even the good case is still pretty bad. We have

seen an unprecedented decline in economic activity, and it's a long way back,"

Macklem said in his first public remarks since taking over from Poloz on June 3.

Poloz last month said a fairly quick and strong recovery was still possible and

told reporters downbeat outlooks were a bit overblown.

     "We are in a deep hole, and it's going to be a long way out of this hole,"

Macklem added. 

     --ACT IF NEEDED

     The BOC won't restore economic forecasts dropped in April at the July 15

policy decision, with Macklem saying he would stick with a focus on scenarios.

With rates at a lower bound of 0.25%, further balance sheet expansion may be

needed to keep financial markets liquid and support the return from record

unemployment, he said.

     "I'm not concerned about the size of the balance sheet -- the expansion of

the balance sheet is entirely necessary," Macklem said. "If you look at our

balance sheet compared to a number of other central banks, it's still relatively

small and we have significant capacity." 

     BOC assets have grown to almost CAD500 billion, more than 20% of Q1 GDP,

and the central bank is continuing with weekly federal bond purchases of at

least CAD5 billion. 

     --DEFLATION

     Several replies to questions about the needed policy response touched on

the extraordinary pandemic, made worse by the crash in exported crude oil prices

and record consumer debts. 

     "The longer it goes, the more painful it becomes, and the problems

accumulate," he said. His testimony didn't reference further moves being used or

considered in the U.S. and Australia such as yield curve control or more

explicit forward guidance.

     There are no signs inflation will surge and "we have no intention of

raising interest rates in the current circumstance," he said. "We are more

concerned about the risk of deflation."

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

[TOPICS: M$C$$$]