MNI STATE OF PLAY:BOC Needs QE For a While, Depends on Rebound

Bank of Canada Governor Tiff Macklem said Wednesday quantitative easing is needed for a while given the economy won't return to full output until 2023, but added he may taper federal government bond purchases if the economic rebound is better than projected.

"This will be a gradual process," he said at a press conference when asked about scaling back the purchases. "We expect a protracted recovery, this is going to take some time, we are going to need this program for some time."

The bank affirmed it will keep buying at least CAD4 billion a week of debt until the recovery is well underway. The written decision said that "as the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required." Canada's dollar strengthened as the decision on QE and to hold the 0.25% interest rate upended some bets on a "micro" rate cut or more stimulus amid the second wave of Covid-19.

Macklem did tell reporters that if things became significantly worse he could adjust QE or other tools to add more stimulus as well, consistent with past comments.

TAPER IN APRIL?

The BOC raised its 2022 growth forecast much more than it reduced the expectation for this year, citing faster-than-expected vaccine rollouts that will propel consumer spending and business investment. GDP will gain 4% this year instead of the 4.2% predicted in October, while gaining 4.8% next year instead of 3.7%.

The BOC's economic forecast paper Wednesday said its CAD548 billion balance sheet may shrink in coming months as CAD140 billion of t-bills and term repos come due, though that's not a good measure of the amount of stimulus. Macklem said in response to a question from MNI that reduced holdings of short-term assets reflect the passing of the market squeeze at the start of the pandemic, and the longer-term government bond purchases being made now are a sign of stimulus at work.

Economists surveyed by MNI before the decision said the BOC will taper to CAD3 billion in April. Some investors also see the BOC needing to avoid frictions created with the central bank on track to own half the government bond market this year. The BOC said today its purchases have lifted the central bank's share of the federal bond market to 36% from 32% in October, and Macklem in December said he was very far away from a point where markets would be hindered.