Incoming Bank of Canada Governor Saw ‘Stop-Start’ Recovery After Lockdown

May 11, 2020 Updated: May 11, 2020

TORONTO/OTTAWA—Newly appointed Bank of Canada Governor Tiff Macklem projected a halting economic recovery during an exclusive interview conducted before he was named, suggesting he will continue the central bank’s loose monetary policy approach.

Macklem spoke to Reuters in an extended interview on April 9. He has not spoken about future policy moves since being appointed on May 1 to a seven-year term, which begins on June 3.

“Expect setbacks,” Macklem said of the recovery less than a month before his appointment. “It could be stop-start… it’s not going to be a rapid return to normal.”

Prime Minister Justin Trudeau warned on Saturday that if provinces move too quickly to reopen their economies, a second wave of the coronavirus pandemic could force the country “back into confinement this summer”.

“I expect there will be economic damage and there will be a need for some more traditional types of stimulus,” Macklem said in April. “The top of that list would be infrastructure spending.”

Macklem does not set fiscal policy, but he held a senior leadership role at the finance department during the 2008-2009 global financial crisis and chaired an expert panel on sustainable finance for Trudeau’s Liberal government.

BMO Capital Markets chief economist Doug Porter said that, with interest rates near zero and high budget deficits, “we are going to need some pretty close cooperation between fiscal and monetary policy at least for the next year if not for the next few years.”

Canada’s budget watchdog estimates a tenfold spike in the fiscal deficit to more than C$250 billion in the current fiscal year, while the Bank of Canada’s cut interest rates to 0.25 percent and begun a program of large-scale asset purchases for the first time.

‘Mark Carney-like’

Economists say that Macklem, who was senior deputy governor at Canada’s central bank when influential former Bank of England Governor Mark Carney was governor, is more likely to increase the size of asset purchases rather than adopt negative interest rates if the central bank sees the need to ease further.

Once the recovery is in motion, the bank could introduce a conditional commitment to keep the benchmark overnight interest rate low for a long period, a measure favoured by Carney in the 2008-09 crisis, and resist upward pressure on borrowing costs by setting a target for long-term rates.

“Mr. Macklem brings a lot of Mark Carney-like capabilities to the Bank,” said Karl Schamotta, chief market strategist at Cambridge Global Payments. “His international connections give him insight into and influence over developments in other areas of the global financial system.”

The oil price collapse has worsened the impact of the coronavirus crisis on Canada’s commodity-linked economy, with the central bank projecting a contraction in output by as much as 30 percent in the second quarter from its level at the end of 2019.

“As this crisis has shown, Canada is very rarely the protagonist in its own story,” Schamotta said. “Events elsewhere have enormous influence on conditions here.”

By Fergal Smith and Steve Scherer