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Governor Tiff Macklem brushed off accusations the Bank of Canada is financing Justin Trudeau’s deficits and fueling inflation risks, even as he acknowledged there are limits to how much government debt it can buy.
In parliamentary testimony on Thursday, Macklem faced questions from opposition Conservative Party lawmakers over the central bank’s quantitative easing program, which has been used to buy nearly $200 billion in federal government bonds since April.
Macklem declined to characterize the purchases as government financing, said the program was grounded in the central bank’s inflation targeting mandate and promised to stop it once the recovery was fully underway.
“We need a lot of monetary stimulus to support the recovery,” Macklem said in a semi-annual appearance by the Bank of Canada governor at the House of Commons finance committee. “We are not financing the government.”
Macklem did acknowledge the central bank risks distorting the bond market if its holdings get too large. He cited research showing holdings of more than 50 per cent of outstanding bonds would start impairing market functioning.
But with the Bank of Canada’s current share at 30 per cent, “we have quite a lot room,” Macklem said. The program will probably be terminated before inflation returns sustainably to the Bank of Canada’s two per cent target -- expected sometime in 2023.
Canada’s main opposition party has been cautioning the central bank against financing the Liberal government’s spending plans beyond immediate pandemic emergency measures, with Conservative lawmaker Pierre Poilievre warning the bank in October against becoming an “ATM for Trudeau.” The bank has committed to buying at least $4 billion in Canada government bonds a week to keep borrowing rates low.
Poilievre was the main questioner for the Conservatives on Thursday, asking at one point whether the central bank’s actions could lead to faster-than-expected inflation. Macklem said his decisions will be “grounded” on keeping inflation at two per cent, and committed to that target in his testimony.
“If it turns out that we’re wrong and there is more inflationary pressure than we expect, we will adjust” policy, he said.
In addition to the bond purchases, the central bank has lowered its overnight policy rate to 0.25 per cent and said it expects to keep it there until 2023. Macklem said the Bank of Canada has options beyond quantitative easing to provide further stimulus, including cutting its benchmark rate to zero and even into negative territory if needed.