Macklem Says Long Way Out of Deep Hole for Canada’s Economy

(Bloomberg) -- Bank of Canada Governor Tiff Macklem said a full recovery is a long way off for the country’s economy, requiring interest rates to remain at historical lows indefinitely.

Macklem, speaking Tuesday in his first public appearance since taking the helm at the central bank on June 3, said the biggest risk to the country’s outlook is that the policy response would be too weak, unnecessarily prolonging the crisis.

“For now and for the foreseeable future, we are focused on providing the monetary stimulus and delivering low interest rates to support the recovery,” Macklem said in testimony before the House of Commons Standing Committee on Finance. “‘We have no intention of raising interest rats in the current circumstances.”

Strict social distancing measures and mandatory business closures to curb the virus outbreak have caused almost 3 million job losses and put more than one-third of Canada’s labor force on government support programs.

The Bank of Canada, under Macklem’s predecessor Stephen Poloz, took unprecedented actions to make sure businesses, institutions and consumers had access to credit. The bank cut interest rates by 175 basis points to 0.25% and started its first ever large-scale asset purchase program.

“Someday we will get through this, the economy will be recovered and interest rates will start to move back to more normal levels,” Macklem said. “We’re in a deep hole and its going to be a long way out of this hole.”

Tough Spot

Since January, the bank has expanded its balance sheet to C$500 billion ($369 billion), an amount the governor said he’s “not concerned about,” given it’s “still relatively small and we have significant capacity.” Besides that, the expansion of the balance sheet was necessary to keep financial markets functioning smoothly and to avoid a massive credit crunch, he said.

In his opening statement before the committee, Macklem said the bank will continue to purchase Government of Canada bonds until an economic recovery is well underway.

Canada is in a particularly tough spot, having suffered not only from the pandemic but also the plunge in oil prices. Macklem said demand for oil will be lower for some time to come, extending the length of the recovery.

While the Bank of Canada has coordinated its actions in step with the federal government and agencies, Macklem made sure to defend the bank’s independence.

“As Governor, I will protect the Bank’s ability to act independently, consistent with our mandate, because that independence is critical to the confidence that Canadians place in us, the credibility of our inflation target, and our capacity to achieve it,” Macklem said, adding that the bank’s 2% inflation target takes on added importance during the crisis.

©2020 Bloomberg L.P.