MNI POLICY: New BOC Governor Macklem Says Bold Action Needed

By Greg Quinn

     OTTAWA (MNI) - Canada named Tiff Macklem its new Bank of Canada Governor

Friday, and the business school dean and former No. 2 at the central bank

endorsed continuing unprecedented asset purchases to carry the economy through

the Covid-19 pandemic.

     Macklem takes over June 3 as Stephen Poloz's seven-year term ends, also the

date of the next BOC policy announcement. The incoming governor agreed with

Poloz that the current 0.25% policy rate is effectively the zero lower bound

because going negative could spook savers and destabilize markets.

     The BOC's moves so far are vital in today's crisis, Macklem said at a press

conference in Ottawa. The health shutdowns aren't like a regular recession and

the economy needs help through what will be a phased restart, he said.

     "This is an unprecedented situation and calls for an unprecedented

response," said Macklem, who was also a top finance department official through

the global financial crisis. He said that part of thinking about crisis

leadership involves "the need to try to overwhelm a crisis, you need to think

sort of beyond the normal responses, you need to restore confidence."

     Macklem struck a slightly different tone than that of Poloz's speech

Thursday where the current governor said the recovery could be fast and robust.

While both used the analogy of rebuilding after a natural disaster, Macklem said

"it's not going to be a snap back to normal, it's going to be a phased approach,

where this virus is going to be out there for some time, and the Bank of Canada

will play its role." 

     Macklem was nominated by the BOC's board of directors and approved by

Finance Minister Bill Morneau. Macklem and Morneau affirmed they are committed

to central bank independence as the BOC is buying up federal and provincial

government bonds. The BOC balance sheet has already nearly tripled to a record

CAD349 billion, including CAD5 billion of federal bond purchases a week and up

to CAD50 billion of provincial debt. 

     The two policymakers need to work closely as the bond purchases make it

easier to finance what the budget office says will be a record deficit worth 13%

of GDP this year. Provincial government bond markets also froze up earlier this

year, at a time when energy-producing provinces like Newfoundland and Alberta

struggle with an oil crash.

     The government and BOC need to renew the framework for the BOC's 2%

inflation target, up for renewal next year. That system has been in place since

the early 1990s and there is little sign it will see a big overhaul. The BOC

stopped regular economic forecasts last month but said a worst-case scenario

would see GDP drop 30% in the first half and inflation turn negative into early

next year.

     Macklem's appointment came over current Senior Deputy Governor Carolyn

Wilkins, in a BOC that in its early history often filled the top job internally.

Macklem left the BOC to lead the University of Toronto's business school when he

was passed over for the top job in favor of Poloz, and his appointment extends a

more recent trend of leaving out current top deputies stretching back to David

Dodge. 

     Officials today did not clearly state whether Wilkins would finish her

seven-year term that began in May 2014. Some economists had Wilkins taking the

job because she oversaw the creation of the current emergency toolkit, and

because a government that espouses feminism could have made her the BOC's first

female leader.

     Macklem's toughest task may be the exit strategy. Government debt purchases

raise the potential for political conflict, and the economy faces wildly

different ways out of the health shutdowns.

     Before the pandemic the biggest risk was consumer debts surging to exceed

GDP as families used jumbo mortgages to buy million-dollar houses in Toronto and

Vancouver -- a trend egged on by low-for-long interest rates. The country's

dollar has also been relatively stable, but history shows most governors face

spells of major volatility that can imperil exports to the U.S. that are the

economy's lifeblood.

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

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