September 09, 2021 | 13:09
BoC's Macklem Lays Out Path to QE Exit
Bank of Canada Governor Macklem's speech tread little new ground on the economy, mostly repeating what was in yesterday's policy statement. On inflation, he notes that they "continue to expect that these factors pushing up inflation will be transitory" (he's referring primarily to supply disruptions), suggesting the addition of the word "expected" yesterday wasn't a big change. However, it's clear that there is concern that supply chain issues could persist longer than anticipated—something highlighted in the policy statement as well. He also noted that the BoC is looking deeper into the labour market to better understand how the still-high level of unemployment squares with the proliferation of help-wanted signs and difficulty to get workers.
On QE, Macklem said the move toward eventual reinvestment is contingent on the economy and inflation outlook...nothing new there. He stated that the pace of reinvestment will be between $4 bln and $5 bln per month, to keep the total holdings of Government of Canada bonds "roughly stable". That would be consistent with a $1 bln per week pace, which could mean that the next taper, widely expected to come in October (cutting QE from $2 bln to $1 bln), could also mark the start of the reinvestment phase. However, the notable maturities don't really start until next year, so the BoC can plausibly wait until January to make the shift to reinvestment official. Throughout the QE section of his speech, Governor Macklem stressed that cutting QE purchases is not tightening. He later said that when they do start to tighten, "our first move will be to raise the target for the overnight rate", so reinvestment could continue for some time.
One tidbit of new information is that the Bank will cut its primary and secondary purchases of GoCs during the reinvestment phase. The extent of the trim in auction purchases (primary) will depend on issuance through the course of 2022. There's about $70 bn in BoC holdings maturing next year, so the purchase pace will need to be a little over $5 bln per month to keep the balance sheet stable. If the BoC sticks to the $4 bln-to-$5 bln per month pace noted in the speech, the balance sheet will likely shrink modestly next year.
Key Takeaway: Governor Macklem outlined the path to reinvestment and what that phase will look like. He made it clear that the Bank will be buying bonds for some time yet, as reinvestment will likely continue even beyond the first rate hike.