Jul 15, 2020
Full transcript: One-on-one with Tiff Macklem
'If we have to do more, we have the capacity, and we will': BoC's Macklem
Why did you feel it was so important to be clear with Canadians that rates will stay low and that you will stand ready with quantitative easing for as long as necessary?
The recovery started and we're seeing some good numbers, but it's going to be a long climb back and considerable policy support is going to be required. Fiscal policy is taking a lead, but monetary policy has an important complementary role to play. We wanted to be very clear to Canadians that the Bank of Canada is going to be there through the full length of this long climb back.
We have seen your projections out to 2022. You're projecting growth for the economy if all goes well. How long do you see the Bank of Canada remaining accommodative?
So there's a lot of uncertainty out there and so we didn't provide a regular projection. We provided something we call a ‘central scenario’ and we did that really to highlight that it's highly conditional on the course of the virus itself.
We expect a recovery in two phases: We expect to see a pretty good bounce back through the third quarter; but then we see a longer, slower, bumpier recuperation phase. And our message to Canadians is that the Bank of Canada is going to be there to support recovery through both phases; and, to make that message clear, we have provided an unusual amount of forward guidance indicating that the policy rate would stay at the effective lower bound until economic slack is absorbed so that our inflation comes to our inflation target of 2 per cent.
We reinforced that with a continued commitment to our quantitative easing program to buy at least 5 billion of government of Canada bonds per week. We didn't put that forward guidance on a calendar — I expect other forecasters will. But if you look in the monetary policy report, it's pretty clear from the charts that are provided that, in our central scenario and in scenarios close to it, that would imply that the policy interest rate would be at the effective lower bound for at least two years. There's a lot of uncertainty around that scenario, but I think the message is pretty clear: interest rates are going to be very low for a long time.
Some of the uncertainty, of course, is around what the recovery looks like. We've seen this gradual reopening in Canada. We don't know yet whether we'll see any rebound or spikes in COVID. As you say, it's a scenario because there are so many unknowns. Are you pretty confident about the path we're taking?
I think it's hard to say we're pretty confident. I think we are very confident that a considerable amount of monetary stimulus is required and that we're going to have to keep that stimulus in place for a considerable amount of time. The purpose of putting out a central scenario is that even though there's considerable uncertainty around it, it is the scenario that guided us in our policy deliberation. As data comes in, we will be evaluating that relative to that central scenario. If we need more monetary stimulus, we will do that.
What might that look like? You said — and obviously you were there in '08 and ’09. We didn't get into quantitative easing then; we’re there now. The balance sheet is expanding. It will continue to do so. What will the next step or a different step of accommodation look like?
We discussed and we have a variety of exceptional monetary policy tools. We're using [large scale asset purchases] or quantitative easing. Those can be scaled. Our balance sheet has expanded rapidly, but it's still relatively modest when you compare it to some other major central banks. There is certainly scope. We've used forward guidance today. There are other types of tools, like the yield curve control that some central banks are using like Australia and Japan and we're certainly looking at their experience. As I said, if we have to do more, we have the capacity and we will do more.
When you talk about more, things like yield curve control, etcetera, would it be a second wave that forces an economic shutdown again? I mean, are we talking dire scenarios there?
There are a lot of scenarios around the central scenario. As I said, we will be evaluating incoming data relative to that scenario. We're expecting to see some very good numbers in the near term. Once we get through that near term, it's going to be very important to assess how many jobs are not coming back, how much damage is there to the economy, how many businesses are not reopening, and at that point we'll get a better sense of what this second bumpier recuperation phase of the recovery is going to look like.
One of the unknowns is how much of the lost growth is permanent. Are you beginning to start to try to forecast that or understand what that looks like, or do you have to wait months and months before we actually begin to see what the carnage looks like?
We are at the very beginning of what is going to be a long recovery. In the monetary policy report, we do lay out our assumptions for the supply side, but there's no question we will be updating those as new information becomes available. There's a lot we don’t know.
We went into this pandemic with concerns about the level of household debt in Canada and there were even growing concerns about where we were in the debt cycle on the corporate side, getting a little late in the game. We're now being told we're low for long. Presumably the assumption is, we should go out and borrow. What's your thinking around the concern about household indebtedness?
We've highlighted, as you suggested, a number of times that the level of household indebtedness is a vulnerability for the Canadian economy. Right now, the most important thing is to support recovery and get people back to work. The best predictor of whether somebody is going to pay their mortgage is whether they have a job. And so yes, high household indebtedness is a vulnerability, but supporting the recovery and reducing that vulnerability are entirely aligned and by holding interest rates low across the yield curve, that will reduce debt burdens for Canadians.
The other thing I would underline is that fiscal policy plays an important role. Fiscal policy has replaced the incomes that Canadians have lost on average as a result of COVID. We've actually seen the savings rates go up and certainly some households are paying down debt. So, yes it's a vulnerability, but the best thing we can do to minimize that vulnerability is support recovery and keep rates low.
On the fiscal side, we’ve obviously avoided worst case scenarios as you note yourself in the MPR. Things weren't as bad as we feared they would be. Some of that will be because of fiscal support. When you measure the risk of removing fiscal support too early because of concerns about deficits versus the mounting deficit and the long-term consequences, where do you come down?
As you suggested, what we've learned from past recoveries is that if you withdraw the policy support too early, there's a real risk of stunting the recovery, stalling the recovery. That harms Canadians. It also ends up costing more in the end. So the fiscal stimulus system in place is extremely important. The wage subsidy has just been extended; that will certainly be helpful.
We've also learned from our experience of the 1990s when we had our own debt sustainability problems, when you have a large structural deficit, that is harmful and ultimately it's unsustainable. So certainly that is something to avoid. The good news is Canada started from a strong fiscal position. We had no structural deficit and we had the lowest debt-to-GDP ratio in the G7, which we still have today.
We have this interesting debate now between whether we have more to fear from deflation or inflation. I know one clever answer is we'll see both. What's your view of what might be headed our way in terms of — I don't mean healthy inflation, but inflation that we need to fear?
Right now inflation is about zero. Certainly our best estimate is we have a large output gap. Yes, supply has contracted, but demand has shrunk considerably more. That's putting further downward pressure on inflation. So we expect that inflation is going to remain weak for some time, and given that it's already around zero, we're more worried about disinflation than inflation and that's really reflected in why we've provided clear forward guidance that interest rates are going to be low, very low, for a long time.
There is so much uncertainty, but just one last quick question I’d ask: What's the thing that you'd think is the biggest risk to your own scenario?
Clearly, a huge risk and a really unknowable risk is the course of the coronavirus itself. In our central scenario, we have allowed for some local flare-ups and some local restrictions and I think it's going to be very important for Canadians, for businesses to make sure that they're ready for those local flare-ups and we can manage them and use fairly local responses. Clearly, the biggest risk is that as we reopen the economy, we do get a widespread second wave and we need another second lockdown. That would certainly be a big setback to the recovery. It would put us well below our central scenario and clearly that would be a case where we would definitely need more monetary stimulus.