NEW GOVENOR OF THE BANK OF CANADA WEARING
A CANADIAN FLAG PRIDE PIN
OTTAWA — The COVID-19 pandemic will leave some long-term economic damage that will only become clearer as the country moves further along a "prolonged and bumpy" course to recovery, Canada's top central banker says.
In his first speech as governor, Tiff Macklem said the central bank expects to see growth in the third quarter of this year as people are called back to work and households resume some of their normal activities as restrictions ease.
But he quickly warned Canadians not to expect the short and sharp economic bounce-back expected over the coming months to last.
The combination of uneven reopenings across provinces and industries, the unknown course of consumer confidence, and unemployment rates will "likely inflict some lasting damage to demand and supply," Macklem said in a speech Monday.
The exact extent of the damage in terms of the number of lost jobs and business closings won't become clear until the country is further along the reopening phase.
And even when things start looking up, he said there is the potential for setbacks from new outbreaks.
"As we get through that reopening phase, though, we do think that the pace of the recovery will slow and that will reflect the reality that not everybody's job is coming back," Macklem said at a midday press conference.
"Some companies aren't going to make it to the other side of this. New companies will form, existing companies will seize new opportunities, but that takes some time and that's going to be a slower, bumpier process that is going to require ongoing support."
The central bank's support against the economic shock caused by the pandemic has been a drop to its policy interest rate to 0.25 per cent, which Macklem says is as low as it will go.
The Bank of Canada has also launched a purchasing program of bonds and government debt to help markets function and make borrowing cheaper for households and businesses. Such purchases, known as quantitative easing, also send a signal that the bank's key rate "is likely to remain low for a long period," he said in his speech.
The bank has a number of other tools it can use to deliver some monetary stimulus beyond the interest rate, Macklem said, including scaling its purchasing programs or providing more direct forward guidance on activities as other central banks have done.
"Going forward, the types of measures we take will depend on the circumstances. Different measures have different effectiveness in different circumstances. And they will be guided by the achievement of our inflation target," he told reporters.
"We'll be flexible, we'll be resolute, we're going to be innovative and we're going to be determined."
For the Bank of Canada, the impact of structurally low interest rates and the scale of the shock are having what Macklem said is "a profound impact" on the inflation-rate target.
The central bank targets an annual inflation rate of two per cent as measured by Statistics Canada's consumer price index.
The basket of goods used to form the index has been shaken by a shift in consumer spending habits during the pandemic. People are spending less on gasoline, which usually receives a heavier weight in calculating inflation, as its price has plunged and the frequency of car travel has dropped. Spending is also down on travel, while grocery spending is up.
Last week, Statistics Canada reported the annual pace of inflation was -0.4 per cent in May, marking the second consecutive month for negative annual inflation after a reading of -0.2 per cent in April.
In his speech, Macklem said the bank expects supply to be restored faster than demand, which could put downward pressure on inflation. BMO's Benjamin Reitzes wrote in a note that Macklem's message suggests bank policy remaining easy for some time.
Next month, the Bank of Canada will provide "a central planning scenario" for the economy and inflation to help guide bank policy, as well as related risks — such as local, but not national, lockdowns.
"The central scenario would embody the reality that there probably will be some more local flair-ups," Macklem said.
"Hopefully, with each flair-up we get better at targeting it, isolating it, and closing it down faster than the one before."
This report by The Canadian Press was first published June 22, 2020.
Jordan Press, The Canadian Press
Macklem Sees Long Road Ahead for Canada’s Economic Recovery
Shelly Hagan Bloomberg June 22, 2020
(Bloomberg) -- Canada’s economy will take a long time to fully recover from the Covid-19 lockdowns, requiring the central bank to continue purchases of government bonds to keep interest rates at historical lows indefinitely, according to Tiff Macklem.
In his first public speech as governor, Macklem said Canada’s economy should resume growth in the third quarter as containment measures are lifted. He cautioned, however, that any recovery will be “prolonged and bumpy” and the central bank will be “laser-focused” on supporting the rebound with stimulus.
“It will be a very long period before we start discussions about removing stimulus,” Macklem said in response to questions after his speech, which he gave via video-conference to Canadian Clubs and Cercles canadiens. “It’s not a discussion we’re engaged in right now.”
The economy will get an immediate boost as containment measures are lifted, people are called back to work, and households resume some of their normal activities,” Macklem said. “But it will be important not to assume that these growth rates will continue beyond the reopening phase.”
The Bank of Canada, under Macklem’s predecessor Stephen Poloz, took unprecedented actions to make sure businesses, institutions and consumers had access to credit. The bank cut interest rates by 175 basis points to 0.25% and launched a series of programs to inject hundreds of billions of cash into the economy. That includes its first ever large scale asset purchase program to buy government debt -- known as quantitative easing.
The central bank will continue to buy government bonds until a rebound is “well underway,” Macklem said, adding that policy makers are worried that demand will be slow in recovering, which could put downward pressure on inflation without the stimulus.
Long and Gradual
Macklem’s comments echo those of Deputy Governor Lawrence Schembri, who said last week the second phase of the recovery will be long and gradual because of the lingering uncertainty around the virus. The bank sees the economy rebounding quickly during the first phase after governments allow normal activities to resume. But after that, the growth trajectory may be uneven and slow, since not all industries will be able to operate until a vaccine is created.
“The expected long road back indicates that the Bank will need to provide more stimulus, likely in the form of a more aggressive quantitative easing program,” Royce Mendes, an economist at CIBC World Markets, said in a report to investors.
The Bank of Canada has bought almost C$400 billion ($296 billion) in assets since the crisis began to inject liquidity into financial markets. Macklem highlighted on Monday how the purpose of that cash injection has been changing, with the focus now on keeping interest rates low rather than ensuring markets are functioning properly. That’s meant more of the liquidity is targeted at buying up government debt, rather than short-term money market instruments held by banks.
Macklem reiterated the bank will continue to purchase at least C$5 billion of Canadian government bonds a week to help lower long-term borrowing costs for households and businesses and signal that rates will remain low for a long period.
The bank continues to express concern around the potential for lower inflation. Although businesses are reopening, millions of Canadians remain out of work and spending has dropped. The bank expects supply to be restored faster than demand, which could put downward pressure on prices.
“Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work,” Macklem said.
Macklem isn’t a fan of negative rates. The governor made sure to highlight in his speech that low rates could lead to distortions in the behavior or financial institutions, while reiterating policy makers will using asset purchases until a recovery is underway. He didn’t specify when he expects that will happen.
Next month, the bank will deliver its July Monetary Policy Report which will contain a central planning scenario for output and inflation. Still, the bank says the pandemic has created a ‘fog of uncertainty’ which has made it difficult to give a clear outlook.
“The course of the coronavirus is the biggest source of uncertainty,” Macklem said. “Beyond that, we don’t know how global trade and supply chains will evolve, or what will happen with domestic supply and demand,” or even how spending habits will change or confidence rebounds.
Yet, the economy is showing signs of stabilization and as the data comes in, the bank feels more comfortable in its ability to answer some of those questions.
(Updates with Macklem’s comments throughout.)
©2020 Bloomberg L.P.
In his first speech as governor, Tiff Macklem said the central bank expects to see growth in the third quarter of this year as people are called back to work and households resume some of their normal activities as restrictions ease.
But he quickly warned Canadians not to expect the short and sharp economic bounce-back expected over the coming months to last.
The combination of uneven reopenings across provinces and industries, the unknown course of consumer confidence, and unemployment rates will "likely inflict some lasting damage to demand and supply," Macklem said in a speech Monday.
The exact extent of the damage in terms of the number of lost jobs and business closings won't become clear until the country is further along the reopening phase.
And even when things start looking up, he said there is the potential for setbacks from new outbreaks.
"As we get through that reopening phase, though, we do think that the pace of the recovery will slow and that will reflect the reality that not everybody's job is coming back," Macklem said at a midday press conference.
"Some companies aren't going to make it to the other side of this. New companies will form, existing companies will seize new opportunities, but that takes some time and that's going to be a slower, bumpier process that is going to require ongoing support."
The central bank's support against the economic shock caused by the pandemic has been a drop to its policy interest rate to 0.25 per cent, which Macklem says is as low as it will go.
The Bank of Canada has also launched a purchasing program of bonds and government debt to help markets function and make borrowing cheaper for households and businesses. Such purchases, known as quantitative easing, also send a signal that the bank's key rate "is likely to remain low for a long period," he said in his speech.
The bank has a number of other tools it can use to deliver some monetary stimulus beyond the interest rate, Macklem said, including scaling its purchasing programs or providing more direct forward guidance on activities as other central banks have done.
"Going forward, the types of measures we take will depend on the circumstances. Different measures have different effectiveness in different circumstances. And they will be guided by the achievement of our inflation target," he told reporters.
"We'll be flexible, we'll be resolute, we're going to be innovative and we're going to be determined."
For the Bank of Canada, the impact of structurally low interest rates and the scale of the shock are having what Macklem said is "a profound impact" on the inflation-rate target.
The central bank targets an annual inflation rate of two per cent as measured by Statistics Canada's consumer price index.
The basket of goods used to form the index has been shaken by a shift in consumer spending habits during the pandemic. People are spending less on gasoline, which usually receives a heavier weight in calculating inflation, as its price has plunged and the frequency of car travel has dropped. Spending is also down on travel, while grocery spending is up.
Last week, Statistics Canada reported the annual pace of inflation was -0.4 per cent in May, marking the second consecutive month for negative annual inflation after a reading of -0.2 per cent in April.
In his speech, Macklem said the bank expects supply to be restored faster than demand, which could put downward pressure on inflation. BMO's Benjamin Reitzes wrote in a note that Macklem's message suggests bank policy remaining easy for some time.
Next month, the Bank of Canada will provide "a central planning scenario" for the economy and inflation to help guide bank policy, as well as related risks — such as local, but not national, lockdowns.
"The central scenario would embody the reality that there probably will be some more local flair-ups," Macklem said.
"Hopefully, with each flair-up we get better at targeting it, isolating it, and closing it down faster than the one before."
This report by The Canadian Press was first published June 22, 2020.
Jordan Press, The Canadian Press
Macklem Sees Long Road Ahead for Canada’s Economic Recovery
Shelly Hagan Bloomberg June 22, 2020
(Bloomberg) -- Canada’s economy will take a long time to fully recover from the Covid-19 lockdowns, requiring the central bank to continue purchases of government bonds to keep interest rates at historical lows indefinitely, according to Tiff Macklem.
In his first public speech as governor, Macklem said Canada’s economy should resume growth in the third quarter as containment measures are lifted. He cautioned, however, that any recovery will be “prolonged and bumpy” and the central bank will be “laser-focused” on supporting the rebound with stimulus.
“It will be a very long period before we start discussions about removing stimulus,” Macklem said in response to questions after his speech, which he gave via video-conference to Canadian Clubs and Cercles canadiens. “It’s not a discussion we’re engaged in right now.”
The economy will get an immediate boost as containment measures are lifted, people are called back to work, and households resume some of their normal activities,” Macklem said. “But it will be important not to assume that these growth rates will continue beyond the reopening phase.”
The Bank of Canada, under Macklem’s predecessor Stephen Poloz, took unprecedented actions to make sure businesses, institutions and consumers had access to credit. The bank cut interest rates by 175 basis points to 0.25% and launched a series of programs to inject hundreds of billions of cash into the economy. That includes its first ever large scale asset purchase program to buy government debt -- known as quantitative easing.
The central bank will continue to buy government bonds until a rebound is “well underway,” Macklem said, adding that policy makers are worried that demand will be slow in recovering, which could put downward pressure on inflation without the stimulus.
Long and Gradual
Macklem’s comments echo those of Deputy Governor Lawrence Schembri, who said last week the second phase of the recovery will be long and gradual because of the lingering uncertainty around the virus. The bank sees the economy rebounding quickly during the first phase after governments allow normal activities to resume. But after that, the growth trajectory may be uneven and slow, since not all industries will be able to operate until a vaccine is created.
“The expected long road back indicates that the Bank will need to provide more stimulus, likely in the form of a more aggressive quantitative easing program,” Royce Mendes, an economist at CIBC World Markets, said in a report to investors.
The Bank of Canada has bought almost C$400 billion ($296 billion) in assets since the crisis began to inject liquidity into financial markets. Macklem highlighted on Monday how the purpose of that cash injection has been changing, with the focus now on keeping interest rates low rather than ensuring markets are functioning properly. That’s meant more of the liquidity is targeted at buying up government debt, rather than short-term money market instruments held by banks.
Macklem reiterated the bank will continue to purchase at least C$5 billion of Canadian government bonds a week to help lower long-term borrowing costs for households and businesses and signal that rates will remain low for a long period.
The bank continues to express concern around the potential for lower inflation. Although businesses are reopening, millions of Canadians remain out of work and spending has dropped. The bank expects supply to be restored faster than demand, which could put downward pressure on prices.
“Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work,” Macklem said.
Macklem isn’t a fan of negative rates. The governor made sure to highlight in his speech that low rates could lead to distortions in the behavior or financial institutions, while reiterating policy makers will using asset purchases until a recovery is underway. He didn’t specify when he expects that will happen.
Next month, the bank will deliver its July Monetary Policy Report which will contain a central planning scenario for output and inflation. Still, the bank says the pandemic has created a ‘fog of uncertainty’ which has made it difficult to give a clear outlook.
“The course of the coronavirus is the biggest source of uncertainty,” Macklem said. “Beyond that, we don’t know how global trade and supply chains will evolve, or what will happen with domestic supply and demand,” or even how spending habits will change or confidence rebounds.
Yet, the economy is showing signs of stabilization and as the data comes in, the bank feels more comfortable in its ability to answer some of those questions.
(Updates with Macklem’s comments throughout.)
©2020 Bloomberg L.P.
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