MNI POLICY: TEXT: BOC Poloz Press Conference Statement

By Greg Quinn

     OTTAWA (MNI) - Good morning. Senior Deputy Governor Wilkins and I are glad

to have the opportunity to answer your questions about today's policy

announcement and Monetary Policy Report (MPR). Allow me to begin with a few

comments.

     The Canadian economy is experiencing a significant and rapid contraction.

The shock is a global one, affecting all countries, but commodity-producing

countries like Canada are being hit twice. In the very near term, policy-makers

can do little more than cushion the blow.

     It is worth spending a moment to emphasize why the central bank's inflation

targets matter so much, even at a time such as this. Inflation targets were put

in place around the world when the dominant worry was higher inflation. Today,

the situation is very complex. However, Governing Council agreed that the

balance of forces points to weaker demand and a decline in inflation as the

dominant concern. Inflation targets provide an anchor for the economy--

particularly inflation expectations-- and a guide for policy actions equally in

today's situation. Keeping inflation close to target means taking measures to

ensure that the economy stabilizes and then returns to full capacity. Failing to

do so now would mean that inflation would persistently fall short of target.

     If inflation were to fall short of target for an extended period, faith in

that anchor would be eroded, and policy-makers would face even greater

challenges in returning the economy to full capacity. This challenge can become

particularly acute should inflation fall persistently below zero. Sub-zero

inflation, or deflation, would interact with existing indebtedness in a

particularly undesirable way. Specifically, negative inflation would increase

the real value of outstanding debts while it would erode the ability of

companies and households to service their debt-- a very difficult mix for the

financial system.

     Fortunately, the risk of sustained deflation in Canada is low, for several

reasons. First, there has been a vigorous and elastic response from governments

to the pandemic. These actions will put a floor under the economy and lay the

foundation for the subsequent recovery. This is especially true for wage

subsidies, which are designed to maintain the employee-employer relationship,

thereby buttressing confidence and facilitating the recovery. Second, Canada

began the pandemic episode with the economy operating near potential and

inflation around its 2 percent target. Just as a healthy, fit individual is more

likely to shake off a COVID-19 infection, a healthy economy is more likely to

recover quickly from a major negative shock. Third, Canada has enjoyed

considerable success in keeping inflation close to target for more than 25

years. This means that investors, firms and households expect that the Bank will

act to help return the economy to capacity and bring about stable, 2 percent

inflation. The Bank's recent actions should be seen in exactly that light.

     In recent weeks, Governing Council lowered our policy interest rate three

times to 0.25 percent, which we consider to be its effective lower bound. These

moves were based on analysis of the factors we could measure immediately--

mainly the likely fallout on the economy from the collapse in oil prices, as

well as the immediate effects of measures to contain the novel coronavirus. This

preliminary analysis indicated that cutting rates all the way to the effective

lower bound was the best contribution the Bank could make to stabilizing the

economy and complementing the government's efforts.

     Looking ahead, the outlook is highly conditional on how long the

containment measures remain in place, and how households and firms adapt.

Governing Council agreed that it would be false precision to offer its usual

specific forecast. Instead, we chose to offer two plausible illustrative

scenarios for the economy-- one should be thought of as a "best case" given

where we find ourselves today, while the other is a much more severe scenario.

Many possible outcomes lie between these scenarios, but based on the Bank's new

analysis, Governing Council concluded that substantial monetary stimulus needed

to be in place to lay the foundation for the post-containment economic recovery.

     For the Bank's policy actions to reach companies and households and foster

a robust recovery, it is crucial that financial markets function well. In the

past few days, Governing Council's deliberations focused mainly on what

additional actions the Bank could take to achieve this goal. There has been some

improvement in market functioning. But important strains continue, and Governing

Council acknowledged that near-term borrowing requirements of governments and

the private sector are likely to pose further challenges. We decided to increase

the Bank's participation in the government's treasury bill auctions to 40

percent of each new issue, and to underscore that our program of purchasing at

least $5 billion per week of Government of Canada bonds in the secondary market

could be increased at any time, should market conditions warrant it. A similar

argument applies to provincial government bond markets, which are seeing

significant strains-- hence our decision to supplement our program to buy

provincial money market securities by also buying up to $50 billion in

provincial bonds.

     Governing Council also noted that the corporate bond market continues to

show signs of stress, although our program to purchase commercial paper has

helped. Governing Council reasoned that the Bank's presence in the secondary

corporate bond market would ease some of these strains and announced a $10

billion purchase program aimed at high-quality corporate borrowers. In addition,

Canada's major banks face relatively high longer-term funding costs in the

corporate bond market, a factor that is leading to upward pressure on some

longer-term mortgage rates, despite the 150-basis-point drop in our policy rate.

For this reason, Governing Council decided to lengthen the term of its weekly

repo operations to allow for funding for up to 24 months. This should lead to

improved funding conditions for the major banks and therefore help companies and

households benefit more from monetary stimulus.

     The Bank has so far accumulated over $200 billion of new assets-- amounting

to about 10 percent of Canada's GDP in liquidity support for the economy-- and

the Bank's balance sheet has expanded by about this amount as a consequence.

This is natural at a time when financial market participants and firms seek to

increase their levels of liquidity because it is the central bank's job to

fulfill those needs. If we failed to do our job, increased liquidity demands

could instead lead to a contraction of credit availability, with obvious

consequences for individuals and the economy. When financial tensions ease as

the pandemic runs its course, these extra liquidity demands will dissipate, and

the Bank's balance sheet expansion can reverse over time.

     The Bank stands ready to augment the scale of any of its programs should

market conditions warrant it. Governing Council agreed that the combination of

aggressive fiscal action and monetary stimulus will create the best possible

foundation for the recovery period.

     Before concluding, let me point out that this MPR is unique in one other

respect. This is the 25th anniversary of the first MPR, published under Governor

Gordon Thiessen's leadership in May 1995. We have marked this event by using the

same front page as 25 years ago. Ironically, I was one of the architects of that

first MPR, and today's will be my last. I wish the circumstances were more

favourable.

     With that, Senior Deputy Governor Wilkins and I will now be happy to take

your questions.

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

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