Remarks by Sharon Kozicki
Deputy Governor
Canadian Association for Business
Economics
June 13, 2024
Ottawa, Ontario
Exceptional policies for an exceptional
time: From quantitative easing to
quantitative tightening
Good morning. Thank you, Bolanle, for your kind introduction. I am pleased to be
here in my hometown of Ottawa with the Canadian Association for Business
Economics.
I always enjoy speaking to a room full of economists and business professionals
long been some of the most engaged
who are interested in the economy. You've
consumers of central bank speeches. The COVID-19 pandemic and subsequent
rise in inflation have broadened the audience for speeches like this one.
Canadians have questions for us at the Bank of Canada, and we want to answer
them.
So today my overarching themes will be transparency and accountability. I will
begin by taking you back to the start of the pandemic when the world faced a
and economic crisis like nothing we'd
health experienced before. I will walk you
through what the Bank saw and how we interpreted that information. Then I will
talk about some of the actions we took, particularly our use of two exceptional
tools: quantitative easing, or QE, and extraordinary forward guidance.
I'll some of the analysis we've done on the effectiveness of QE, which we
discuss
used for the first time in the pandemic. I will also go into the unwinding of QE,
known as quantitative tightening, or QT, which is a key part of the monetary
policy cycle.
the Bank's efforts to
In the second half of my speech, I will dive more deeply into
I'll talk
assess our actions during the pandemic and learn from that analysis.
we've already And I'll
about some of the lessons that shared with Canadians.
give you some insight into a new review we are doing on our use of exceptional
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monetary policy tools in the pandemic, including details on how we will
communicate the results of that work.
After an event like the COVID-19 pandemic, it is important to take a step back
and learn from the experience. That way we can sharpen our response for the
next crisis. Sharing what we learn with the public is critical so Canadians not only
understand our actions, but also know we are accountable to them.
talk about, so let's dive in.
We have a lot to
A crisis like no other
First, let me take you back to March 2020. As the COVID-19 pandemic took hold,
large parts of the economy shut down and financial markets were severely
shaken. Policy-makers here and around the world were worried we would see a
repeat of the Great Depression.
Confronted with an unprecedented crisis, the Bank took immediate action. We
cut the policy rate to 0.25%, which is our effective lower bound. We also
launched emergency liquidity facilities and programs to restore financial market
functioning. And the Bank did not act alone. Governments in Canada did their
part, as did governments and central banks around the world.
By the summer of 2020, financial markets were functioning again, but Canada
was still in a health and economic crisis.1 Millions of people had lost their jobs
and we were facing the deepest economic decline in decades. Inflation had
turned negative, and there were worries that deflation would take hold. We did
not have a vaccine at that point, so there was no way to know when, or even
how, the pandemic would end.
Faced with the unknowable, Governing Council judged more stimulus was
needed to revive the economy and sustainably return inflation to the 2% target.
Interest rates were as low as they could go, so the next step was to look in our
extended monetary policy tool kit.2 Two tools were well suited: QE and
extraordinary forward guidance.
Our exceptional actions
Remember, monetary policy is all about shifting the timing of spending to
stabilize economic activity and inflation. Central banks lower interest rates to
encourage spending when the economy is weak. Whether it is individuals buying
things such as home office furniture and fitness gear or a business investing in,
say, new facilities or equipment-this spending protects jobs and ensures the
economy won't end up as weak as it
could have been.
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But when policy interest rates are as low as they can go, central bankers need
other tools to add stimulus. This is where QE and extraordinary forward guidance
come in.
Under QE, a central bank buys a lot more government bonds than usual. This
bids up the price of the bonds and lowers their returns, or yields. Lower yields on
government bonds pull down the lending rates that matter to households and
businesses. This makes borrowing cheaper.
Extraordinary forward guidance also helps bring down longer-term rates. The
way it works is a central bank signals it will keep the policy rate at its lowest
possible level until a specific condition is met or for a specific period, which is
typically longer than financial markets would otherwise expect.
By lowering borrowing costs, both QE and extraordinary forward guidance
encourage spending and reduce the risk that inflation will fall short of the 2%
target.
These exceptional policies can also have an effect through the exchange rate.3
All else equal, lower interest rates in Canada may prompt some investors to shift
their funds out of Canadian dollars and into other currencies. This could lead the
Canadian dollar to depreciate. A weaker currency makes Canadian exports more
attractive, which boosts the economy.
Let's
turn now to the effectiveness of QE and extraordinary forward guidance
during the pandemic.
One way to gauge the impact of exceptional policies is to look at how other
Here, I'll compare
interest rates moved compared with our policy rate. how much
five-year government bond yields fell relative to the decline in our policy rate.
Let's consider the last four periods
when the Bank cut interest rates by 150 basis
points (bps) or more: the mid-1990s, the early 2000s, the 2008-09 global
financial crisis and, finally, the COVID-19 pandemic (Chart 1). Keep in mind, we
could not lower the policy rate as much in the pandemic as in the other periods
because we were already close to the effective lower bound. Despite this,
fiveyear rates moved more relative to our policy rate during the pandemic.
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Chart 1: The movement of long-term rates relative to the policy rate in
recent easing cycles
Ratio of change in the five-year Government of Canada bond yield to the total decline in the
policy rate
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1995-96 2000-02 2007-09 2019-20
Note: The five-year yield for the pandemic cycle peaked in December 2019, the month the first COVID-19 cases emerged globally.
The decline in both the policy rate and the five-year rate is from their highest level to their lowest level within the easing period.
Source: Bank of Canada
The pandemic was the first time the Bank used QE and only our second time
using extraordinary forward guidance. The higher movement of five-year rates
relative to the policy rate during the pandemic suggests these exceptional
policies were effective.
Focusing in on QE, there are various ways researchers can assess the impact of
large-scale bond purchases on yields. A common method is to use event studies,
which look at how much bond yields move at the time central bank purchases are
announced. Using this method, Bank staff estimate the impact of QE to have
been about 20 bps on 10-year government bond yields. However, the impact
may have been much larger. The same study finds that because there was some
expectation the Bank would do QE even before purchases were announced,
4
10year bond yields could have been as much as 80 bps higher without QE.
For context, we would need to cut the policy rate by a lot more than 20 bps or 80
bps for it to have a similar impact on 10-year yields. This is because the effect of
policy rate changes typically fades away after a couple of years.
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Let me explain why bond yields would have been higher without QE.
Early in the pandemic, governments were issuing far more bonds than usual. If
investors were to purchase the higher volume of bonds over a short period of
time, they would expect higher yields. But the Bank's QE purchases meant that
investors didn't have to increase their purchases
as the bonds were issued. This
helped keep yields, and borrowing rates for households and businesses, from
Bank's
rising.5 Put another way, the research suggests that without QE,
longerterm interest rates would not have been as low as they were.
Of course, many domestic and global factors affected bond yields early in the
pandemic. This means estimates of QE's impact on yields are imprecise.
Likewise, it is difficult to be exact in estimating how QE affected the economy.
Bearing that uncertainty in mind, the research I mentioned earlier finds that QE
may have pushed up gross domestic product (GDP) by as much as 3% at its
peak.6
let's
So, now look at how the economy actually fared during the pandemic
Recall that we were worried about a repeat of the Great Depression.
(Chart 2).
Millions of people were out of work, GDP was cratering and inflation was well
below target. There were concerns that making up lost ground would take years.
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Chart 2: The economy recovered relatively quickly during the COVID-19 pandemic
Real GDP, quarterly data, index: 2019Q4 = 100
Index
115
110
105
100
95
90
85
80
75
70
65
2018 2019 2020 2021 2022 2023 2024
Range of scenarios - April 2020 Monetary Policy Report Real GDP
Note: GDP is gross domestic product. In the April 2020 Monetary Policy Report, the Bank used scenarios
rather than a base-case projection due to the uncertainty of the COVID-19 pandemic. Range of scenarios
represents the plausible paths the economy could have taken based on those scenarios.
Sources: Statistics Canada and Bank of Canada calculations and projections Last observation: 2024Q1
Instead, the economy recovered relatively quickly. In Canada, vaccines were
rolled out widely in the first half of 2021. GDP rebounded and reached its
prepandemic level later that year, supported by monetary and fiscal policy.
Another way to see the impact of our monetary stimulus is to look at growth rates
of money and credit.
different measures of money. But let's look at
There are many M1++, which
notes in people's
includes currency in circulation-the bank purses, pockets or
wallets-plus chequing and savings deposits. The growth rate of M1++ tends to
reflect the impacts of all our monetary policy actions, including changes to the
policy interest rate and our use of exceptional tools.
During the pandemic, M1++ grew much faster than in other periods of monetary
That's
policy easing since 1990. despite limits on how much the policy interest
rate could be reduced (Chart 3).
As monetary policy eases, it also stimulates borrowing by households and firms.
This shows up in credit growth, with a lag relative to money growth. During the
pandemic, credit growth also increased, though its higher growth rate was still
within historical experience.
Together, these data suggest our policies were effective in increasing borrowing.
- 7 -
Chart 3: Money and credit growth rates increased in the COVID-19 pandemic
Year-over-year growth rates, monthly data
%
30
25
20
15
10
5
0
-5
-10
1996 2000 2004 2008 2012 2016 2020 2024
Core CPI range M1++ Total household and business credit
Note: Core CPI range is CPI-trim and CPI-median. M1++ is all currency in circulation as well
as chequing and savings deposits.
Sources: Statistics Canada and Bank of Canada
Last observation: March 2024
Before moving on, I'd like to comment
more generally on money growth and
I'm not going to pretend that we got everything right in our pandemic
inflation.
response, but the evidence suggests that the run up in inflation that started in
2021 was mainly driven by supply-side issues, including commodity price swings
and supply disruptions.7 When we look at the last three decades, we see very
little correlation between money growth and inflation.
With that said, let's now move on to quantitative tightening.
Our progress in unwinding QE
By mid-2021, it was clear the economic recovery was happening faster than we
expected. For its part, inflation had climbed above 3% and over the months that
followed it began to broaden. It was getting closer to the time to start tightening.
In October 2021, we were the first major central bank to end QE. We started
raising the policy interest rate in March 2022. And then in April 2022, we began
QT.8 As monetary policy tightened, money growth eased and then contracted
(Chart 3).
When we started QT, we said we would let bonds roll off our balance sheet as
they matured and not replace them. This would allow our balance sheet to shrink
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predictably and has allowed government debt holdings to shift gradually from the
Bank to the private sector. Since we began QT, our Government of Canada bond
holdings have declined by about 45%, without disrupting financial markets
(Chart 4). QT also proceeded smoothly through the tensions in the US banking
sector in the spring of 2023.
Chart 4: Changes to the Bank of Canada's balance sheet
Monthly data
Cad$ millions
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2019 2020 2021 2022 2023 2024
Total Government of Canada direct and guaranteed securities
Deposits by members of Payments Canada
Source: Bank of Canada Last observation: May 2024
We expect QT to end sometime in 2025, which would also make us one of the
first central banks to wrap up the normalization process.
I like to think it's because we have
Why has QT been so smooth in Canada?
been transparent. Information on our bond holdings and their maturities is
publicly available. And we have provided regular updates to the public and
market participants on where we are going and our progress in getting there.
Being accountable to Canadians
Let's briefly go back to the
That brings me to transparency and accountability.
beginning of the pandemic. Try to remember just how little we knew about the
virus and how it would affect our lives and the economy.
In those early days, there was simply too much uncertainty for our standard
analysis, and that is exactly what we told Canadians. We didn't provide a
Monetary Policy
basecase projection in the April and July 2020 Reports. Instead, in
April, we outlined various scenarios of how the crisis might play out. And in July,
we used a central scenario to help explain our assumptions about the pandemic
what we didn't know and
and the economy. In both cases, we were clear about
about the range of possibilities we were considering.
We were also transparent about the actions we were taking. For example, we
released a summary of deliberations for the unscheduled rate decision on March
13, 2020, and we provided weekly balance sheet updates after rolling out
largescale asset purchases to restore market functioning.
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As the pandemic progressed, we began to reflect on the effectiveness of our
policy decisions and other actions. We shared those findings with the public.
In the July 2022 Monetary Policy Report, when inflation was near its peak, we
detailed the main factors behind our prior inflation forecasting errors.9 I want to
highlight two key points about this. First, we did this work at a time when prices
were still climbing sharply-in essence, we were reviewing our actions in real
didn't wait until the crisis was over to share our findings with
time. Second, we
the public. We put them out as quickly as we could. We did this because we
wanted to be transparent with and accountable to Canadians.
In December 2022, Governor Tiff Macklem spoke in detail about the lessons
learned from the Bank's
experience with unexpectedly high inflation. He also
touched on how those lessons would shape our decision-making process going
forward.10
In March 2023, Deputy Governor Toni Gravelle gave a speech assessing the
Bank's
market interventions during the pandemic.11 His remarks drew from a
detailed review by staff of the emergency programs and facilities the Bank used
to restore market functioning at the onset of the pandemic.12
Over the course of 2023, my colleagues and I continued to speak frankly about
what we were seeing in the data and our takeaways. In his year-end speech, the
Governor updated Canadians on how we were applying pandemic lessons to our
work. And he detailed how the Bank was enhancing its models, surveys and
analysis to sharpen our future responses, particularly in times of uncertainty.13
I'd be remiss not to mention
As well, that my remarks today draw on research
and analysis by Bank staff throughout the pandemic. This work is crucial to
building our understanding of how the economy acts in unpredictable times and
to ready us for the next crisis.
So where are we now? Higher interest rates have worked, inflation is now below
3% and we are seeing more signs that underlying price pressures are easing
(Chart 5). This makes it a good time to take stock of our pandemic response.
9
See Bank of Canada, "Appendix: Main factors behind inflation forecast errors," Monetary Policy
Report (July 2022).
10
Macklem,
T. "Putting the resolute in resolutions: Looking ahead to lower inflation" (remarks to
the Business Council of British Columbia, Vancouver, British Columbia, December 12, 2022).
11
"The Bank of Canada's market liquidity
T. Gravelle, programs: Lessons from a pandemic"
(remarks to the National Bank Financial Services Conference, Montréal, Quebec, March 29,
2023).
12
G. Johnson, "A Review of the Bank of Canada's Market Operations Related to COVID-19,"
Bank of Canada Staff Discussion Paper No. 2023-6 (March 2023).
13
T. Macklem, "The path to price stability" (remarks to the Canadian Club Toronto, Toronto,
Ontario, December 15, 2023).
Chart 5: Total and core inflation have eased but remain above the 2% target
Year-over-year growth rates, monthly data
%
10
Inflation target set at 2%
8
6
4
2
0
-2
1990 1994 1998 2002 2006 2010 2014 2018 2022
Core CPI range Inflation target CPI inflation
Note: CPI is consumer price index. Core CPI range is CPI-trim and CPI-median. Inflation targeting was
introduced in 1991 and the target was gradually lowered from 4% in November 1991 to 2% in December 1995.
Sources: Statistics Canada and Bank of Canada
Last observation: April 2024
As I mentioned earlier, we are putting together an in-depth review of all our
exceptional actions taken during the pandemic, including the market-functioning
programs, QE and extraordinary forward guidance. This review will draw on
that's
analysis already been done, and some that is in-progress. It will lay out our
we've already shared, and
lessons learned, including some identify questions
that will guide future work.
It is important that we learn from our own actions, but it is also important to get
other perspectives. Therefore, this review will be assessed by external experts.
We expect the final report to be published early next year.
While this review is a significant step, it is not the final word. Questions will
continue to be asked that may shape if and how we use our exceptional tools in
the future. These questions are particularly valuable in a world where the next
crisis may look different from those in the past.
Conclusion
To wrap up, the pandemic was a period defined by the unknowable. Uncertainty
was particularly high. So, the Bank took a risk management approach to
decision-making. We considered alternative futures and thought about the
consequences of making policy errors. Governing Council then chose a policy
course that accounted for those risks.
Our research into our use of exceptional tools during the pandemic suggests
those policies helped lower longer-term interest rates by increasing monetary
policy stimulus even after the policy rate was brought as low as possible. The
unwinding of QE through QT has gone smoothly.
However, it is worth remembering that we faced an unprecedented shock when
we decided to use QE. The bar for us to use QE again is very high.
Last week, we cut the policy rate to 4.75%. If inflation continues to ease-and
our confidence that inflation is headed sustainably to the 2% target continues to
increase-it is reasonable to expect further cuts. But we are taking our interest
rate decisions one meeting at a time.
It is comforting to see inflation come down. But it is alarming that it rose as much
as it did. Our focus now is on the lessons we can take from our pandemic
experience and how those lessons will guide the future application of monetary
policy.
time. I'm happy to take
Thank you for your any questions.