Quick take

Bank of Canada Governor: rougher water, but steady on the tiller

• In a speech to the Fédération des chambres de commerce du Québec, governor Tiff Macklem outlined the Bank’s thinking on the path of monetary policy for the next couple of years.
• The speech followed the Bank’s decision a day earlier to hold its benchmark overnight rate to 0.25 per cent, while also maintaining its Quantitative Easing (QE) program of federal government bond purchases at $2 billion per week.
• Downward revisions to Statistics Canada’s measures of output showed that the economy was not as strong as originally believed in the middle part of the year. But, the Bank believes that growth is still in the cards later in 2021, despite the curve thrown by COVID-19’s delta variant.
• When the time comes to move policy—possibly this fall—the governor says the Bank will first head to a reinvestment phase where it will limit its bond buying program to only replace maturing bonds. At that point, purchases will only average around $1 million a week.
• To keep balance, purchase reductions will be made in both the primary and secondary bond markets
• Once the Bank stabilizes its asset purchases and the economy allows, it will turn to raising the policy interest rate, which is still expected to be in the final half of 2022.

Key implications:

• The two-stage approach to tapering and future rate changes are important signals on when the bank believes Canada’s economy is robust enough to operate without the extraordinary monetary stimulus injected so far since the beginning of the pandemic.
• The Bank must also steer around private and public debt levels, which after years of Canadians borrowing at low rates, could leave many with rising debt service costs that could sink other forms of spending.
• The governor’s aim is to move policy levers in concert with economic growth without awakening inflationary expectations.
• Price increases have been above the Bank’s target band since the summer, but Tiff Macklem reaffirmed the Bank’s view that the causes are confined to temporary COVID-related supply chain disruptions.
• If growth and inflation progress as the Bank expects, the tapering of asset purchases will mean more federal government borrowing will have to be done through the open market.