— Macklem: After QE Tapering, Reinvestment, BOC Will Raise Rates
— Macklem: Canada Q2 GDP Slump Caused by Supply Chain Disruptions
— Macklem: Easing Global Supply Chain Constraints Could Take Time
By Max Sato
(MaceNews) – The Bank of Canada still considers the recent surge in domestic inflation a temporary phenomenon but it is uncertain how long it will last and to what extent, as global supply chain constraints linger amid the pandemic, BOC Governor Tiff Macklem said Thursday.
The base effect is making the year-on-year jump in consumer prices from the pandemic-hit 2020 (+3.7% in July) “appear more dramatic” while global supply disruptions are pushing up higher prices for motor vehicles and other goods, the central bank chief said in a speech in Montreal.
“We continue to expect that these factors pushing up inflation will be transitory, but their persistence and magnitude are uncertain and we will be monitoring them closely,” Macklem warned.
On the other hand, wage increases have been “moderate to date” and that medium-term inflation expectations “remain well-anchored,” he said, indicating the bank is confident about guiding the annual inflation rate to a stable 2% within a 1-to-3% target range.
Macklem repeated the bank’s statement issued Wednesday that supply chain network disruptions and the rising number of Covid-19 cases in many regions “pose a risk to the strength of the global recovery.”
The BOC analyzes that the 1.1% annualized drop in Canada’s GDP in the second quarter reflected a sharp drop in exports, combined with a pullback in housing activity, he said, but also pointed out that consumption, business investment and government spending all contributed to growth.
Shipping bottlenecks are also leading to longer delivery times and higher prices for some other goods, causing households to delay spending on these items. Macklem said.
“We expect these global supply chain problems will gradually be resolved, but it could take some time,” he predicted.
As the economy reopens, the unevenness in the labour market is moderating, “but considerable slack remains, and some groups are still being disproportionately affected, particularly low-wage workers,” he said.
“Pulling this all together, the Governing Council continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery,” said the governor.
Bank of Canada policy-makers are sticking to their stance to take their time unwinding quantitative easing amid growing uncertainty over global and domestic economic recovery.
The bank’s Governing Council announced Wednesday that it is holding the target for overnight lending rates at 0.25% and maintaining the pace of weekly asset purchases at C$2 billion after reducing it from C$3 billion in its last policy decision on July 14.
Since October 2020, the bank has been gradually reducing the pace of purchases of government debt from financial institutions in step with economic recovery. Canada was a late comer to the world of quantitative easing, launching its own QE program in July 2020 with an initial weekly pace of $5 billion.
“As the recovery progresses, we are moving closer to a time when continuing to add stimulus through QE will no longer be necessary,” Macklem said. “We are not there yet, and that timing is a monetary policy decision that will depend on economic developments.”
The governor said after the reinvestment phase in the QE program, in which the central bank maintains its balance sheet by reinvesting in bonds to replace maturing securities, the next step for the BOC will be to start raising the target for short-term lending rates as part of the policy normalization process.
“Eventually, when we need to reduce the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate,” Macklem said.
After the reinvestment phase, the bank will stop purchasing bonds to replace the ones that are maturing, so its holdings of Government of Canada bonds will decline, he said. He stressed that “when we do eventually need to reduce monetary stimulus, our first move will be to raise the target for the overnight rate, our policy interest rate.” He didn’t discuss whether the bank would consider outright selling of its government debt holdings, which is a more drastic way to reduce stimulus