Opening Statement by Tiff Macklem
Governor of the Bank of Canada
Appearance before the House of Commons
Standing Committee on Finance
November 26, 2020
Ottawa, Ontario
Good afternoon, Chair and committee members. Senior Deputy Governor Wilkins
and I are pleased to be back to discuss our latest Monetary Policy Report (MPR)
and the outlook for the Canadian economy.
The main message is that we will get through this pandemic, but it's going to be a
tough slog, and the Bank of Canada will be with Canadians every step of the
way.
Let me briefly summarize our outlook for the economy, as set out in our MPR.
Our projection is highly conditional on our assumptions about the virus. Simply
put, the health of the economy really depends on how the pandemic evolves.
authorities won't need to reinstate the sort of extensive and
We assumed that
widespread containment measures we saw in the spring. But we can expect
successive waves of the virus to require localized restrictions. We also assumed
that vaccines and effective treatments will be widely available by mid-2022. Since
we released the MPR four weeks ago, news about vaccines has been
encouraging, while virus cases have continued to rise and containment
measures have escalated.
Our last appearance before this committee was in June. Since then, the
Canadian economy has bounced back sharply as many businesses have
reopened. We have regained close to 80 percent of the jobs lost since the start of
the pandemic. But the economy still has more than 600,000 fewer jobs than it did
before the pandemic.
The current job losses are concentrated in the services sector, particularly in
lower-wage jobs where physical distancing is difficult. That is why the income
support measures put in place have been so important for the recovery.
We judge that the very rapid growth of the reopening phase is now over, and the
economy has entered in the slower-growth recuperation phase. For 2020 as a
whole, we expect that the economy will have shrunk by about 5 1/2 percent.
Given the math involved in calculating annual growth rates, we expect annual
growth to average almost 4 percent in 2021 and 2022. But we anticipate that this
growth will be uneven across sectors and choppy over time. Some parts of the
economy will simply be unable to completely reopen until a vaccine becomes
widely available. And some regions that were weaker before the pandemic-
such as the energy-intensive parts of Canada-will face greater difficulties than
others. We expect business investment to remain subdued and exports to grow
only slowly. When we add it up, we project that the economy will still be operating
below its potential into 2023.
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Inflation is also unusually weak. The most recent CPI data has inflation at 0.7
percent in October. We expect inflation to stay below our 1 to 3 percent target
range until early next year. After that, we project it will rise gradually. But with the
economy continuing to operate below its potential, inflation is projected to remain
less than 2 percent into 2023.
projection to be roughly balanced. But it's important
We see the risks around our
to remember that we are operating at the effective lower bound for our policy
interest rate and inflation is well below target. So, we are particularly focused on
the downside risks to our projection.
This outlook, and the historic nature of the COVID-19 shock, mean the economy
will continue to need extraordinary monetary policy support as it recuperates. Let
me spend a few minutes discussing our policy response.
We have lowered our policy interest rate-the target for the overnight interest
rate-to 0.25 percent, which we judge to be its effective lower bound. And we
have used exceptional forward guidance to indicate that we expect it will remain
there for an extended period. Specifically, we have committed to keeping our
policy interest rate at its effective lower bound until economic slack is absorbed
so that the 2 percent inflation target is sustainably achieved. In our current
outlook, this takes us into 2023.
Our forward guidance is being reinforced and supplemented by our quantitative
easing (QE) program. I want to take a moment to explain how QE works and
discuss the adjustments to our program that we announced last month.
Normally, when we need more monetary stimulus to achieve our inflation target,
we lower the target for the overnight interest rate. That leads to lower interest
rates further out on the yield curve at the maturities where households and
businesses typically borrow. This makes credit less expensive and encourages
spending and investment to stimulate the economy and keep inflation on target.
When our policy interest rate is at its effective lower bound, QE provides an
additional way of reducing the interest rates that matter to households and
businesses. By increasing the demand for government bonds, QE acts to lower
their interest rates. And because households and businesses borrow at a
premium to government bonds, QE lowers their cost of credit. In this way, QE is
another tool that supports the spending and investment needed to help create
jobs and get the economy back to capacity, so we can achieve our inflation
target.
We buy these bonds on the secondary market from financial institutions. We pay
for the bonds by creating settlement balances, or central bank reserves. The
ability to create reserves is a very special ability that only central banks have.
And that's why it's important for central banks to be independent from
governments.
At the outset of the pandemic in March and April, core credit markets were
freezing up as economic activity plummeted, and uncertainty soared. If core
aren't working, neither is the economy, and we can't implement
funding markets
monetary policy. So, the Bank launched a number of programs to restore market
functioning, including the Government of Canada Bond Purchase Program
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(GBPP). The program was launched at a pace of $5 billion per week. Purchases
were mostly of shorter-maturity bonds where issuance was strongest.
These purchases led to a substantial increase in the size of our balance sheet.
the Bank's
We were able to move aggressively because, before the pandemic,
balance sheet was small compared with those of other central banks. This chart
from the MPR shows that the value of assets we hold relative to the size of our
economy remains relatively low-even with everything we have purchased so
far.
The Bank of Canada's purchases were aggressive
Central bank total assets as a percentage of GDP, quarterly data*
%
%
150 80
60
100
40
50
20
0 0
2007 2010 2013 2016 2019
Bank of Japan (left scale) Bank of Canada (right scale)
US Federal Reserve (right scale) European Central Bank (right scale)
Bank of England† (right scale)
Reserve Bank of Australia (right scale)
As other central banks took similar actions, global financial conditions stabilized.
This, together with our actions, restored market functioning in Canada. So, since
July, we have scaled back or ended the active use of many of the programs we
We have stopped buying Bankers'
had set up to help markets function properly.
Acceptances, Canada Mortgage Bonds and provincial money market securities,
while our Corporate Bond Purchase Program has been used very infrequently
since July. And we took a series of steps to reduce our purchases of Government
of Canada Treasury Bills in the primary market. At the peak, we were buying as
much as 40 percent at each Treasury Bill auction. Effective November 24, we will
buy in a range of zero to 10 percent. The focus of our bond purchases has
shifted squarely to providing the monetary stimulus required to support the
recovery and get inflation back to its target. As you see in the second chart, our
balance sheet has been relatively stable since July.
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The Bank of Canada's balance sheet size has stabilized
Bank of Canada total assets, weekly data
Can$ billions
600
500
400
300
200
100
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
All other assets* Bankers' acceptances
Treasury bills Government of Canada bonds
Securities purchased under resale agreements
This brings me to our latest policy announcement. Markets continue to function
well. We are providing exceptional forward guidance, reinforced and
supplemented by our bond purchases. Our guidance has anchored interest rates
at the short end of the yield curve. That means we no longer need to buy as
many short-term government bonds as we did at the start of the pandemic.
So, we recalibrated our QE program. To increase the efficiency of our purchases,
we are buying fewer bonds at shorter maturities and more at longer maturities.
This shift is increasing the stimulative impact of our QE program per dollar
purchased, allowing us to reduce our total minimum weekly purchases to $4
billion, while still providing at least as much monetary stimulus.
Here's how that's possible:
Fixed-rate household and corporate borrowing tends
to be most closely linked to 3- to 15-year Government of Canada bond yields,
with some corporations also issuing at longer maturities. By concentrating
purchases at these maturities, we can have a bigger impact on the interest rates
that are most important to households and businesses.
Our QE program will continue until the recovery is well underway.
the Bank's
I hope this provides a good explanation of outlook and policy
response. We work for Canadians, and it is essential that we are accountable to
them. Our appearances before parliamentarians are an important part of that
accountability. But beyond this, monetary policy works better when it is well
understood. The pandemic and the extraordinary actions we are taking in
response only make it more important that we speak clearly, and listen
attentively, to Canadians.
We want to be very clear-Canadians can be confident that borrowing costs are
going to remain very low for a long time. In this way, our forward guidance
combined with our QE program reduce one source of uncertainty. And these
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efforts will help support the spending and investment that the economy needs to
restore lost jobs and achieve our inflation target.
Finally, Chair and Committee members, at the risk of embarrassing my
colleague, I hope you will allow me a couple of minutes to recognize Senior
Deputy Governor Carolyn Wilkins. As you know, Ms. Wilkins has decided not to
seek a second term as Senior Deputy Governor, and has announced she will be
leaving the Bank following our next monetary policy decision in December.
Ms. Wilkins has spent her entire career working for the people of Canada, with
the past 20 years at the Bank of Canada. In her six years as Senior Deputy
Governor, she has provided tremendous leadership as a policy-maker. In
instrumental in helping design the Bank's
particular, her experience has been
response to the pandemic. She has been a champion for research and diversity
at the Bank and has driven the work that will underpin the next renewal of our
inflation-targeting agreement. Thanks to Ms. Wilkins, the Bank has become a
global thought leader in fintech and digital currencies. She has served Canada
with distinction as the Bank's representative
at the G7, the G20 and the Financial
Stability Board. And on a more personal level, I can tell you her deep
understanding of the Canadian economy and her insights at the policy table will
be very difficult to replace. Her commitment to Canadians, her intellectual
leadership and her good judgment are second to none. On behalf of every
Canadian, I want to thank her for her service and wish her every future success.
Thank you, Chair. And with that, Senior Deputy Governor Wilkins and I would be
pleased to answer your questions.