MNI REVIEW: BOC Tapers & Twists QE, Resists Negative Rates

The Bank of Canada tapered and twisted QE Wednesday to help bring low interest rates to firms and households through a prolonged comeback from Covid-19, while Governor Tiff Macklem said the policy rate will remain 0.25% into 2023 unless a new slump brings negative interest rates into consideration.

Macklem told reporters after a policy announcement that negative rates "could be disruptive" in today's economy and the option was not discussed in the latest deliberations. "But it is in the toolkit, and if the situation were to dramatically change, it is something we could consider, that's what I meant by 'never say never,'" a comment he made earlier this month. "The bar would be very high" to move to negative rates, he said. The Bank of Canada said in 2016 around its last mandate renewal that rates could move as low as -0.5%.

The governor also said QE will be more effective even as the pace will be slowed to at least CAD4 billion of government bonds a week from at least CAD5 billion. That's because the focus will shift away from the short end where rates are already very low to longer-term purchases, he said, adding that if more QE is needed later the BOC can adjust again.

"The exit is some way off. By making our program more efficient today, we can actually buy less and provide just as much monetary stimulus, at least as much," Macklem said in response to a question from MNI about other central banks that have failed to end QE a decade after the global financial crisis.

"In a world with a lower neutral rate of interest, we can expect that central banks around the world are going to be hitting the effective lower bound more often, as we go through future cycles, and so we are going to have to think more about how to both use these programs when we need them, and unwind them when we don't need them," Macklem said.

STEADY STANCE

The majority of financial market economists and a shadow council run by the C.D. Howe Institute expected the pace of QE to remain the same today. Several said a tapering was possible because the BOC was on pace to own more than half the stock of federal bonds over the next year.

"Despite some tweaks announced today, the overall stance of monetary policy is little changed with rates set to remain low for an extended period," RBC senior economist Josh Nye wrote in a research note.

Macklem's opening statement stressed a long and difficult recovery ahead, for example saying that potential growth will be limited to 1% through 2023. "We are particularly focused on the downside risks to our projection," he said.