MNI REVIEW: BOC Watches Strong C$, May Curb QE Before Rates Up

Bank of Canada Governor Tiff Macklem said Thursday he will account for strength in his native currency against the U.S. dollar, adding that over the long comeback from Covid-19 it's logical to dial back QE before lifting near-zero interest rates.

"Over the last month we have seen a broad-based depreciation of the U.S. dollar," Macklem said at a press conference following a speech. "It has appreciated a little bit less than some others, and that is certainly something that we will take into account as we assess the amount of monetary stimulus required in the economy."

"Our next decision, which will come with a Monetary Policy Report, and with that a revised central scenario, we will be taking into account any movements in the Canadian dollar in our assessment of how much monetary stimulus is needed," he said. The MPR reports often simply take the recent average exchange rate as an assumption used to build an economic forecast, and the BOC gave up solo currency intervention in 1998.

Still, the BOC view adds to concerns already voiced by the ECB about the U.S. dollar's weakness as the Federal Reserve also seeks easy monetary policy to sustain economic growth during the global pandemic. Fed officials have said their prime focus is the domestic economy.

In response to a question from MNI, Macklem also gave more detail on the main change in yesterday's decision to hold a 0.25% rate until inflation is sustainably at the 2% goal-- a reference to calibrating QE instead of being ready to offer more stimulus as needed. Investors have speculated the BOC could move to QE if the economy stumbles again, or slow the pace of QE if the purchases already worth about 25% of GDP create shortages of some federal bonds.

What to Buy

"When we say we're going to calibrating going forward, what that means is we will be assessing what to buy, as well as how much to buy. Could be more, could be less," Macklem said.

The recovery still has a long way to go so it's premature to consider any real exit strategy, he said. Macklem said the potential timing is evident in the BOC's pledges to buy at least CAD5 billion a week of federal bond purchases until the recovery is well underway, along with holding rates until slack is absorbed and inflation holding on target. "Logically, the recovery very being well underway comes before slack is absorbed," Macklem said.

He downplayed the policy significance of balance sheet growth stalling out after hitting a record CAD547 billion at the end of July, saying that reflects a decline in repo purchases when markets froze earlier this year while federal bond purchases continue. The focus of purchases has shifted to aiding the recovery with a move into longer-term debt more closely linked to consumer and business borrowing costs, he said.

"I don't know what else they can do—time is what's going to recover this economy, it's not going to be more or less asset purchases by the Bank of Canada, it's not going to be the introduction of yield curve control," Ryan Goulding, fixed income analyst at Leith Wheeler Investment Counsel in Vancouver, said in a phone interview. The firm manages CAD20 billion.

Macklem isn't a fan of Modern Monetary Theory, saying it has a long history of "ending badly" in response to an audience question after his speech.

Long Recuperation

The economy will slow in coming months after a burst tied to the re-opening, and restoring the last million or so jobs lost will be much more difficult, he said. "We're moving into the recuperation phase," he said, and "we still have a very long way to go."

His earlier speech made several references to full employment, a sign he may be looking at expanding the BOC's single inflation mandate to add something on jobs, TD Bank senior economist Brian DePratto wrote in a research note.

The BOC is due to renew an inflation targeting deal with the government next year, and Macklem said there is no clearly superior alternative to the 2% target, which Canada has been using for decades now. The Fed's embrace of flexible average inflation targeting in some ways mimics latitude the BOC already has, Macklem said, adding "this is an interesting evolution of inflation targeting, and it's certainly something we will be looking at closely."