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On his first day on the job, the Bank of Canada’s new Governor, Tiff Macklem, and the Governing Council delivered no surprises. The Bank’s monetary policy body left interest rates unchanged. The accompanying communique was upbeat by saying that the pandemic impact had peaked, but it was also cautionary over the enormous uncertainty about the recovery. This suggests a wait and see approach and no alteration in policy at the next meeting in July.
The statement referenced the current 0.25 percent target for the overnight rate as being “the effective lower bound”. While this notion was emphasized in the past, its reiteration suggests that the new Governor is of a similar mindset, and has little appetite for introducing negative interest rates, at least for the time being.
With respect to the economic impact of the global pandemic, as already mentioned, the Bank’s assessment is that the “impact appears to have peaked, although uncertainty about how the recovery will unfold remains high”. The Bank is expecting the global recovery to be protracted and uneven.
The Canadian economy is expected to contract 10 to 20 percent in the second quarter—the enormous range being an acknowledgement of the uncertainty at the moment, but growth is anticipated to return in the third quarter. The estimated second quarter contraction was less than the 15 to 30 percent in the Bank’s April forecast.
We agree with the Governing Council’s thinking on both the global and domestic prospects.
While inflation is below the midpoint of the target range, the Bank expects it to rebound over the medium-term helped by extremely accommodative monetary and fiscal policy.
The Bank’s policy actions have helped financial conditions to improve. This has motivated the Governing Council to reduce the frequency of both its term repo and Banker Acceptance purchases from weekly to bi-weekly. The communique emphasized that large-scale purchases of federal, provincial, and corporate debt will continue at their current frequency and magnitude until the recovery is well underway.
In prior commentaries, I argued that the new Governor is unlikely to significantly alter the path of monetary policy. In addition, this does appear to be the case. Governor Macklem is a steady hand on the tiller of monetary policy.
Since adopting inflation targeting nearly three decades ago, the Bank of Canada has been remarkably successful at achieving its primary mandate of keeping inflation in a range between 1 and 3 percent, targeting its mid-point of 2 percent. Indeed, inflation has averaged 1.9 percent since 1991. With that in mind, we feel there is little reason for Governor Macklem to fundamental alter the Bank’s conduct of monetary policy. In other words “if it ain’t broke, don’t fix it.”