MNI EXCLUSIVE:Only Fresh Slump Would Push BOC to Curve Control

The Bank of Canada would only need to resort to yield curve control if there is another significant downturn as officials are for now confident the current mix of QE and forward guidance can pull the economy through the long rebuild from the Covid-19 pandemic, former senior policymakers told MNI.

The BOC sees the ability to offer stimulus across the entire yield curve as a benefit of using QE and forward interest-rate guidance, sources said. That view also lines up with its historical balance-sheet policy of building up assets that mirror the stock of federal debt, allowing it to remain more of a neutral player in the market.

With government yields near record lows, there is little pressure for now to emulate the RBA's target on 3-year bonds, sources said.

"The yield curve control aspect comes in more in a world where the Bank may need to do more," said Jean-Francois Perrault, chief economist at Bank of Nova Scotia, former assistant deputy minister at Canada's finance department and assistant chief at the BOC's domestic analysis branch.

The BOC would need to see another slide in growth in the second half of this year or in 2021, a fresh spell of disinflation pressures, or signs that existing stimulus isn't as effective as policy makers expected, to move towards YCC, he said. "Something would need to change."

LOW YIELDS

Governor Tiff Macklem's forward guidance for at least two years of near-zero rates is already a type of cap on yields over that period, said Jeremy Kronick, a former BOC economist and associate research director at the C.D. Howe Institute, which runs a shadow monetary policy council.

The bank may not need to put its credibility on the line by committing to low rates for even longer in any form, and instead let markets and fiscal policy take more of the lead, Kronick said.

Macklem is also continuing his predecessor's move to buy at least CAD5 billion a week of government bonds until the recovery is well underway. He said last month that the bank discussed other toolkit options and can deploy them if needed, though actions to date have done a lot to normalize government debt trading.

"QE allows the market to still move rates around to where they think they should be, whereas yield curve control doesn't really give you that flexibility," Kronick said. "I'm not sure they need to turn to any of these more unconventional tools, so the bar to me should be high for taking that next big step into negative interest rates or even yield curve control."

QE OPTIONS

One reason YCC isn't a clear option is because the BOC could simply shift QE purchases to accomplish the same goal of smoothing out specific points on the curve, said Craig Alexander, chief economist at Deloitte Canada, and who has often appeared in front of Parliament.

The BOC needs time to see how the job market recovers from Covid-19 and whether the upheaval across industries throws off estimates of the economy's potential, and that needs to happen before other tools are considered, Alexander said. At a minimum policy makers need to see if a second wave of Covid hits this fall or there is a tumble in the U.S., which buys 75% of Canada's exports.