BoC: The most depleted stockpile of monetary policy ammo any modern governor has inherited – NBF

Warren Lovely and Taylor Schleich from the National Bank of Canada offer up some high-level commentary on how certain conditions evolved under Poloz’s watch, with an eye towards the situation the new guy, Tiff Macklem, inherits next week. 

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Key quotes

“Judged solely on his ability to keep inflation inside the mandated 1-3% target band, give Poloz his due. Before he took over, all items inflation had been relatively muted, falling shy of 1% in five of the seven months leading up to Jun-2013. But inflation fell in line under Poloz; over his seven-year run, headline inflation rarely broke out of the 1-3% target band. [...] Recent BoC speak has acknowledged downside inflation risks, and look for this issue to be taken up in next week’s rate statement, the first of the Macklem regime.” 

“Poloz goes out a net loser on jobs and growth, not that it’s his fault. From Jun-2013 to Feb-2020, 1.5 million net new jobs were created in Canada (average annualized growth of 1.2%), with the unemployment rate hovering at 5½% early in the year. But March and April bloodletting have (at least temporarily) wiped out a combined 3 million jobs, driving joblessness to 13%.”

“As for GDP growth, it’s been somewhat choppy, including a mid-mandate wobble linked to 2015’s oil-price collapse followed by a 2017 resurgence. [...] The peak-to-trough destruction of Canadian output could be around 20%, turning the GDP clock back a decade. Even with wholesale capacity destruction, it could take one half or more of Macklem’s seven-year term to close the output gap opened up by the virus, assuming no second wave or other serious setbacks.”

“When Poloz took over from Carney, the BoC’s policy interest rate was 1%. That seemed low at the time but looks downright juicy vs. today’s 0.25% rate setting. Poloz became the second straight governor to explore the lower effective bound for the policy interest rate and hands a GoC yield curve to Mr. Macklem that belongs in the twilight zone relative to prior leadership transitions. Let’s assume the incoming governor would prefer to avoid negative interest rates in the same way Jay Powell’s Fed is trying to sidestep the negative rate rabbit hole.”

“BoC balance sheet: When Poloz arrived, BoC assets amounted to C$88 billion or less than 5% of GDP. As of last week, assets had ballooned five-fold to C$442 billion. Based on established purchase programs, BoC assets may be en route to ~30% of GDP or more. It’s for Macklem to determine by how much and for how long the BoC’s balance sheet is needed to spur economic recovery.”