MNI POLICY: BOC's Wilkins Defends Record Asset Purchases

--Speech Doesn't Address Her Plans After New Governor Named

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada Senior Deputy Governor Carolyn Wilkins

defended record asset purchases made to carry the economy through the Covid-19

pandemic, without addressing her future role after a new Governor was named

Friday.

     The balance sheet expansion to CAD385 billion last week from CAD120 billion

at the beginning of March is unclogging markets all the way down to bedrock

trading in Canadian government bonds, Wilkins said in the text of a closed-door

speech Monday at the CD Howe think-tank in Toronto. 

     "This dynamic is particularly problematic when it occurs in the market for

GoC bonds because they are held as the safest Canadian-dollar asset and are a

benchmark for other asset prices. If the GoC bond market isn't functioning well,

no other Canadian-dollar market will either," Wilkins said.

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

an increased need for liquidity. This traditional role is consistent with our

inflation objective because an economic recovery cannot be sustained without a

well-functioning financial system," she said.

     --NOT HELICOPTER DROP

     Other programs such as purchases of bankers' acceptances are working,

lowering the spread on those short-term corporate loans to 20bps from 120bps,

she said. The pandemic had hurt market-making activities with asset prices

swinging wildly and investors seeking to rebalance portfolios with cash at a

premium. 

     The programs aim to be consistent with the BOC's 2% inflation target and

broader public policy goals, she said adding that 90% of the purchases expire

within a year. She rejected the idea the new liquidity is "helicopter" money

because of its narrow focus on the financial system. 

     The asset purchase programs can still be adjusted to "monetary policy

objectives, rather than solely market functioning, if needed," she said.

     Wilkins just entered the last year of a seven-year appointment as the

senior deputy, and didn't address her future in public remarks. 

     Tiff Macklem, a former No. 2 at the BOC who left to lead the University of

Toronto's business school, was named governor on Friday. Current top deputies

like Wilkins were traditionally considered top candidates to become governor,

though the last four selections now have gone to outside candidates. 

     --OTHER SPEECH HIGHLIGHTS

*She reiterated that GDP could fall 15%-30% in the first half of 2020, and "even

in a good scenario, lost output will be made up only gradually as containment

measures are lifted, people return to work and production ramps up."

*The BOC is still declining to provide regular economic forecasts, in favor or

more general scenarios: "The most favourable scenario assumed that measures to

slow the spread of the virus would start to be lifted in May and June. This

would herald a firming of foreign and domestic demand and, with it, consumer and

business confidence. This is still within reach, but by no means assured."

*Rate cuts to the effective lower bound of 0.25% "may not spur much demand right

now, but they are laying the foundation for when the recovery gets underway,

once containment measures are lifted."

*"The Bank will do its part to bridge this period and support a lasting

recovery."

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

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