MNI PREVIEW: BOC Seen Standing Pat on Macklem's First Day

--Retiring Poloz, Incoming Macklem, Both See 0.25% as Lower Bound

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada will likely hold its 0.25% benchmark

interest rate and press on with its emergency balance sheet expansion on

Wednesday, in what is expected to be a relatively uneventful handover from

Stephen Poloz to new governor Tiff Macklem.

     Policy makers typically begin deliberations more then two weeks in advance

and the press release is written on Tuesday, according to a background document

on the BOC's website, effectively making the decision a done deal before Macklem

officially arrives. Macklem also told reporters when he was appointed that he

agrees with Poloz's main policy views.

     Those include avoiding negative interest rates that could confuse the

public and introduce new instability into financial markets, and instead using

asset purchases to boost markets and the economy. The major operations are

already established including CAD5 billion of federal bonds a week until the

recovery is well underway, and new programs to buy up to CAD50 billion of

provincial bonds and CAD10 billion of corporates.

     "This is an unprecedented situation and calls for an unprecedented

response," Macklem said May 1 at a joint press conference with Poloz confirming

his nomination. Macklem was a former top BOC deputy who left after Poloz took

the top job seven years ago, and returns after leading the University of

Toronto's business school. 

     The BOC's balance sheet has surged to a record CAD464 billion or 20% of Q1

GDP, and it could rise by another CAD200 billion or more in coming months. The

BOC's government bond and bill purchases help backstop a federal deficit topping

CAD260 billion or 15% of GDP and the economy faces permanent damage after

bottoming out with a 40% annualized decline this quarter. 

     --AVOIDING GUIDANCE

     This decision is the first since January before the global spread of

Covid-19 to have such low expectations for new policies. The BOC cut rates

150bps in March to 0.25% and used the April meeting to ramp up asset purchases,

saying rates were at the lower limit and avoiding forward guidance that was

deployed in the global financial crisis. 

     All economists surveyed by MNI see the rate holding at 0.25% in the

decision due at 10am from Ottawa. 

     Poloz is unlikely to to tie Macklem's hands this week with forward guidance

on interest rates, something he himself shunned even as he cut rates back to

record lows. 

     The BOC will also likely wait until the July meeting that comes with a

Monetary Policy Report to restore the economic forecasts it dropped in April.

That leaves investors mostly focused on any new language regarding the scenario

for output to fall 15%-30% in the first half of the year and the inflation rate

to move towards zero this quarter. 

     While some economists have said the CAD10 billion of corporate purchases

seems small and could be expanded, demand for other facilities aimed at private

companies has slowed in recent weeks, suggesting more isn't needed for now. 

     Poloz has also declined to call his asset purchases QE, saying the aim for

now is stabilizing markets. In its last decision, the BOC, like the Fed, made a

commitment to unlimited support as needed, saying "The Bank's Governing Council

stands ready to adjust the scale or duration of its programs if necessary." 

     With Canada having reported the early tally of damage from Covid-19,

including Friday's report of an 8% annualized decline in Q1 GDP and three

million jobs lost in March and April, the BOC on Wednesday may provide some more

color on the shutdown and recovery. 

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

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