MNI REVIEW: Macklem Bests Carney on BOC Guidance; Hold to 2023

By Greg Quinn

     OTTAWA (MNI) - BOC Governor Tiff Macklem started his seven-year term off

with a thunderclap, signaling unchanged rates through a recovery that runs into

2023 even without another Covid wave, reviving guidance discouraged by Stephen

Poloz and going further than Mark Carney did in the global financial crisis. 

     Macklem said the key rate will remain 0.25% until inflation is sustainably

at the BOC's 2% target, and projected CPI will average 1.8% in Q4 2022. He also

affirmed a pledge to buy at least CAD5 billion a week of federal bonds until the

recovery is well underway and said more stimulus will be deployed if needed to

fight the biggest slump since the Great Depression. 

     "We are being unusually clear that interest rates are going to be low for a

long time, and we judge that combined with the re-enforcement through

quantitative easing provides an appropriate degree of monetary policy to support

the recovery," he told a press conference.

     When asked by MNI if QE will be scaled back well before rates rise, Macklem

indicated that it's possible but that the need to make that decision won't arise

until far into the future. 

     "Logically yes, the recovery being well under way comes before capacity has

been fully absorbed, but those of those are some ways off," he said. "We will be

looking for signs that the recovery is becoming more self-sustaining."

     Economists surveyed by MNI were unanimous the rate would be unchanged, but

few expected forward guidance to come at this meeting because economic data was

still too volatile. 

     BOC officials also discussed the potential of yield curve control before

Wednesday's decision but have not reached a conclusion on deploying the tool.

     --LONG CLIMB OUT

     "The timing of the first BOC hike could be similar to that for the Fed, in

early 2023," CIBC chief economist Avery Shenfeld said in a research note. "The

phrase 'well underway' also suggests that QE will end before the policy rate is

hiked, implying that the BoC will tolerate a steeper curve as the economy and

vaccine research both make progress."

     Macklem said "it's going to be a long climb out" of the pandemic's

disruption even with fiscal policy playing a "critical role" in boosting demand.

GDP will fall 7.8% this year, and in 2022 potential output will still be 4%

below what was expected before the pandemic, according to the BOC's Monetary

Policy Report. 

     The BOC rate matches the lowest since it opened in 1935. Carney first took

the rate to 0.25% in April 2009 before making a "conditional commitment" to hold

that mark for a just over a year. Carney then ended the freeze a bit early as

the economy picked up. 

     There is still little immediate risk seen from deflation, with CPI

estimated at -0.1% in Q2 and +0.4% in Q3 and Q4. The economy likely hit bottom

in April, the BOC said.

     --HOUSING DEBT RISK

     The BOC's scenario assumes no second wave of Covid-19 in Canada or abroad,

though there remain downside risks to global GDP that's expected to fall 5.2%

this year.

     "After the initial bounce back in GDP growth, the economy is expected to

enter a more protracted and gradual recovery," the BOC said. "In Canada, a much

weaker scenario could crystalize the risks associated with high household

indebtedness."

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

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