Macklem Defends Bank of Canada Policy But Warns of Risks

(Bloomberg) -- Governor Tiff Macklem defended the Bank of Canada’s monetary policy during the pandemic, saying it supported the recovery, but cautioned the necessary moves will heighten vulnerabilities in the future.

In a speech Thursday, Macklem said the bank’s interest-rate cuts and asset purchases, along with fiscal relief from the government, have helped buffer the economic carnage from Covid-19. He acknowledged, however, that higher government debt levels will heighten current risks such as elevated debt levels.

“Our policy path will eventually have an impact on financial system vulnerabilities,” Macklem said in prepared remarks at the Global Risk Institute’s 10th anniversary summit. “As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road.”

The bank cut its benchmark interest rate to 0.25% and launched a series of asset purchase programs to keep credit markets functioning and ensure businesses and households had access to cheap credit. At the same time, Prime Minister Justin Trudeau’s government injected the economy with hundreds of billions of dollars to help keep the economy afloat.

Without these actions, the “economic devastation of the pandemic could have been much, much worse,” Macklem said by videoconference.

Current vulnerabilities in the Canadian economy include higher debt levels among Canadian households, businesses and governments. The bank has committed to keeping interest rates low for a long time, which encourages borrowers to take on more debt. This could be a problem if, for example, households take on outsized debt loads relative to their income.

“If too many Canadian households start to become dangerously over-leveraged, policy makers have several macroprudential tools they can use,” Macklem said, citing the government’s prior use of the mortgage-interest stress test and it’s effectiveness.

Macklem said the central bank will be monitoring debt levels closely.

“The bottom line is that the private and public sectors together need to be acutely aware of financial system risks and vulnerabilities as the economy recovers,” Macklem said.

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