EconoFACTS

June 22, 2020 | 12:50

BoC Governor Macklem Comments — Staying Close to Home

Economist

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Bank of Canada Governor Macklem stayed pretty close to home today, with nothing surprising in his first speech on the job. With respect to the recovery, the Bank is expecting a rebound phase with strong growth rates; but, beyond the initial bounce back more modest growth is anticipated amid tremendous uncertainty. Indeed, that’s consistent with our call for GDP growth to rebound sharply in Q3 but only return to 2019Q4 levels at the end of 2021. While the pandemic has damaged both supply and demand, Mr. Macklem expects supply to be “restored more quickly than demand”, which will mean a wider output gap, consistent with policy remaining easy for some time.

Governor Macklem reiterated once again that negative rates aren't likely in Canada, and outlined most of what the Bank is doing with respect to asset purchases. He notes that the BoC now views its asset purchases as Quantitative Easing (QE), after being initially introduced as market stabilizers. However, with markets now functioning better, the asset purchases are now providing stimulus.

He also said that "by giving more certainty about the path of short-term interest rates, this can help lower longer-term borrowing costs." While this was in reference to QE, it suggests that we could see explicit forward guidance as a potential next step from the BoC as asset purchases continue. During the press conference, Mr. Macklem noted that further stimulus options include scaling QE programs, yield curve control and forward guidance.

On inflation, the Bank will look through the temporary basket changes (due to COVID), but watch for more permanent shifts in the months ahead.

Key Takeaway: There's plenty of uncertainty surrounding the outlook and while the BoC expects a decent initial rebound, the growth picture beyond that will likely be more subdued, meaning policy will remain stimulative for some time.