Tiff Macklem, a native of Montreal, succeeded Stephen Poloz as Governor of the Bank of Canada on June 3, in the midst of an unprecedented crisis. He believes that these extraordinary circumstances justify the extraordinary responses of political and monetary authorities. He answered questions from
You say that the central bank’s interventions have had the desired effect. Yet you do not plan to reduce the massive asset purchases in the market and indicate that they could be increased. Why ?
It is our judgment that the economy now needs a lot of monetary easing. We are very aware that households and businesses experience a lot of uncertainty, so we try to be very clear on the evolution of our key rates. We have indicated that they will remain at their lowest level for a long time.
We are in a deep hole. Economic activity fell 15% in the first half of the year. It will be a long recovery and it will be an uneven recovery because not all sectors will be able to reopen because the pandemic is still with us.
Yes, we can do more [if necessary]. We have several tools in our safe. We can adjust our buying program, we can increase government bond purchases. We have a direct credit easing program, buying securities for corporations. We have discussed these tools in our deliberations and our conclusion is that using these tools will give us the necessary monetary easing.
Is there a limit to these asset purchases, which are already inflating the Bank of Canada’s balance sheet to unprecedented levels?
Our balance sheet has grown rapidly, but it is not yet very large vis-à-vis several other major central banks. So we have a lot of space, if we need more monetary relaxation. Is there a limit to what we can do? Of course there is a limit, and that is inflation. Our 2% inflation target is the beacon that guides our policy. Now inflation, the consumer price index (CPI), is about zero, and the pressures on inflation are down. We’re more concerned about deflation than inflation now.
In this regard, do you intend to measure inflation in a different way?
What we can see is that households have changed the way they spend a lot during the pandemic. We don’t travel, we don’t go to the movies, but we buy more food and things for the house, for example.
To get a better measure of inflation in this period when household behavior changed a lot, we worked with Statistics Canada to use other data and adjust the weights [of the different components] in the CPI.
There are quite large changes in the weights and what we see is that the adjusted inflation index has not fallen as much as the CPI, but the difference is not very large. The message is the same: we have near zero inflation, a lot of spare capacity, and we need a lot of monetary easing for a long period of time.
Will the unprecedented measures put in place in Canada, by both political and monetary authorities, allow the Canadian economy to emerge from the crisis more quickly than other countries, such as the United States?
It is clear that if we compare the United States and Canada, at the beginning, we thought it would be more severe in Canada than in the United States because in Canada, we have two shocks, the shock of COVID. and the oil price shock. The drop in the price of oil affects all of Canada because it is our main export and if we export less and the price is lower, there is less money coming into the country.
With the sharp rise in the incidence of COVID cases in the United States, we have reduced our scenario for the United States economy. We estimate the fall will be roughly the same, around 8% in both countries, but we anticipate the recovery to be somewhat stronger in Canada, around 5% growth rate in Canada versus 3.5% in the States. -United. This reflects the fact that with the rising incidence of COVID cases, plans to reopen for the [US] economy are being delayed or reversed.
Companies are complaining that the Canada Emergency Benefit (CEP) hinders hiring and deprives them of the workforce they need to resume operations. Should the federal government start reducing this aid?
There are these anecdotal stories, but it’s important to point out that for households there are several factors that are important for returning to work. Work must be safe, there must be protection against the virus. Another very important factor is that schools are closed, summer camps are closed, daycares are closed. For people who have children, it is very difficult to return to work. There are several factors that determine whether people are able to return to work. We are aware that it is more important for women. Government financial assistance is a factor, but it is not the most important.
Government programs [PCU and wage subsidies] are very important in replacing the income that households and businesses have lost due to the crisis. Above all, wage subsidies are going to be very important to support the recovery.
But it is clear that these programs are extraordinary programs that are set up for the crisis and that they are not meant to be permanent.
Quebec is the province most affected by the coronavirus crisis. Do you think it will take longer for its economy to return to the previous level?
It’s a good question, but frankly, it’s difficult to give a very precise answer. We are at the start of the recovery. Quebec lost 800,000 jobs, and half returned in May and June. It’s a bit stronger than the rest of Canada and it reflects the faster reopening.
We will see significant increases in employment and GDP, but not all sectors will reopen. We will see how much damage will be permanent and what restructuring will take place in the economy.
Many countries are looking at the experience of Quebec. You have reopened your economy faster. You have a few small issues, but basically it’s going well. I hope we will learn together how to reopen the economy without an increase in cases.
Interest rates are going to stay very low for a long time. Are you worried less about Canadian household debt?
We have pointed out several times that household debt is high in Canada. It is a vulnerability. Now, the best thing that can be done to reduce these vulnerabilities is to make sure people have jobs. Someone with a job is going to pay off their mortgage. Otherwise, it’s much more difficult.
It is very important to support the recovery and to have low interest rates for a long time, and to reduce the cost of debt financing. Supporting the economy and reducing vulnerabilities are on the same path now. We are worried about a lot of things.
Does your scenario of what awaits the Canadian economy over the next few months assume that the border with the United States is reopened or that it will remain closed for a long time to come?
We don’t have a specific assumption on exactly when the border will reopen. We have lowered our scenario for the United States economy due to the surge in the incidence of COVID. This has implications for Canada. The recovery of our exports to the United States will be slower than expected. Our assumption is that the restrictions will gradually decrease and that they will all be lifted at the end of the year. But we also believe there will be no vaccine or medication for two years and that COVID will stay with us and distancing measures will remain in place. We called it an intermediate scenario to point out that there are a lot of assumptions around COVID that are very uncertain. This is not a normal forecast.