MNI REVIEW: BOC Lays Path For Poloz's Successor to Go Further

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada Governor Stephen Poloz laid the foundation

for his replacement coming in June to ramp up corporate and provincial bond

purchases even further through a massive recession triggered by health

shutdowns, former advisers told MNI.

     Plans announced Wednesday for the BOC to buy up to CAD50 billion of

provincial government bonds and CAD10 billion of corporate bonds carry risks of

political pressure or of having to pick winners and losers among major CEOs. But

the decision would allow the next governor, who will take over before the next

policy meeting on June 3, to expand purchases should markets or the economy

break down, the advisers said.

     Poloz used his last Monetary Policy Report press conference to say no

government requested a provincial debt backstop, and he acted to ease strain in

that market. Senior Deputy Governor Wilkins, a potential successor, said the BOC

could also move to funding-for-lending or credit easing if needed to loosen up

particular corporate debt markets.

     Questions about independence and exit plans have been deferred until the

economy gets back on its feet.

     "They aren't trying to bail out, it's not solvency question, it's a

liquidity problem," said Stephen Gordon, a professor at Laval University in

Quebec City who advised the BOC on its last inflation-target renewal. Provincial

and corporate purchases may be expanded in coming months he said, without

providing a potential target. "This is what we need to do to keep the hospitals

open."

     --BLURRED LINES

     Corporate purchases are riskier according to Angelo Melino, a University of

Toronto professor who advised the BOC in the global financial crisis. "That to

me was very unusual, and I was very surprised," he said. Central banks aren't

geared towards choosing between distressed debts of for example airlines like

Air Canada or WestJet. Buying corporate bonds also blurs the line between

helping markets function and intervening to curb extreme prices, he said.

     One bridge that will be harder to cross is negative interest rates. Gordon

said he would be "astonished" if a new governor moved rates below zero, although

Melino said the depth of the downturn means the new leader should consider

cutting to say 10bps or even zero. Poloz reiterated negative rates are a bad

idea, doing little to help when the economic strain comes from people stuck in

their houses rather than a lack of desire to spend.

     Moving to full QE or yield curve control would also be difficult with

Canadian bond trading heavily influenced by the U.S. and global debt markets,

the advisers said. Such moves again create the perception the BOC is seeking to

influence prices and not just stabilize markets, said Melino, who added that,

for now, the policy of "all guns blazing" makes sense and may need to continue.

     --RATE GUIDANCE

     Poloz avoided direct forward guidance on rates as used by the Fed, but

lengthened term repo lending to 24 months. That is a clearer sign the BOC may

hold rates around zero for a long time than any jawboning, according to Melino.

     The BOC has bought CAD200 billion of assets so far, equivalent to about 10%

of GDP, Poloz said Wednesday, adding that the Bank is prepared to do more. The

BOC last month laid out plans to buy at least CAD5 billion of federal government

debt a week until the recovery is well underway and 40% of provincial government

paper sales.

     The BOC may buy CAD200 billion of Canadian federal debt alone under the

program, helping offset CAD107 billion of deficit spending on displaced workers

and business owners.

     "The Bank's decision now is how much of this debt to monetize," Melino

said. "That will be the next crisis, when there is political pressure on the

Bank to maintain the size of its balance sheet, rather than stepping out."

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

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