Tiff Macklem, Governor of the Bank of Canada, is photographed during a video conference on June 16 2020.Fred Lum/The Globe and Mail
It didn’t take long in Tiff Macklem’s first public appearance as Governor of the Bank of Canada to give us a small window into the character of the central bank’s new leader. Seven seconds, to be exact.
Early in Mr. Macklem’s video-conference testimony Tuesday to the House of Commons standing committee on finance, Conservative finance critic Pierre Poilievre pressed the new governor on whether he could estimate how many Canadians would be forced into insolvency if the bank were to raise interest rates. (Notwithstanding that the central bank only recently slashed its key interest rate to a record low.)
The Governor took a long, slow burn, before finally expressing his impatience with the line of questioning.
“You know, these questions are extremely hypothetical. We have no intention of raising interest rates,” he said.
It wasn’t quite on the scale of Prime Minister Justin Trudeau’s epic 21-second break after a question about U.S. President Donald Trump’s support of the use of the military against protesters. Still, Mr. Macklem’s pause, followed by his admonishment, sent a message that this governor isn’t easily intimidated or pushed around. Mr. Macklem may have been smiling, but he clearly has fight in him.
He’s going to need it. He has inherited a Bank of Canada that has embarked into unexplored waters with its deep rate cuts and aggressive financial-market actions in response to the COVID-19 crisis, and he will face serious questions with every move it makes – and doesn’t make – from here on out. Starting pretty much immediately.
The biggest questions surround the central bank’s balance sheet. Sometime this week, it crept above the $500-billion mark. That is a more than fourfold increase from three months ago, before the bank flooded a sputtering financial system with liquidity to keep desperately needed credit flowing. Mr. Macklem emphasized in his committee testimony that he is preparing to shift the bank’s policy focus away from stabilizing the markets and toward stimulating the economy. He gave every reason to think that he’ll rely on an even bigger balance sheet to do it.
Mr. Macklem said that the bank remains concerned about the risk of deflation. With its key interest rate already at a measly 0.25 per cent, “there’s only so much monetary stimulus space available” to lean against that risk. The implication is that any additional stimulus would have to come via the balance sheet. It was a door that the Bank of Canada had already opened in Stephen Poloz’s final weeks, but Mr. Macklem kicked it a bit wider.
The most likely scenario is that the bank will redesign its program of large-scale asset purchases - chiefly, billions in government bonds - away from its current purpose of lubricating the financial markets, and toward pushing long-term market interest rates lower. Central bankers refer to this as “yield curve control,” and it’s something that many market participants have been anticipating ever since the bank leapt to the bond market’s defence in early April.
A key question is whether such a strategy would entail an increase in the size of the bank’s bond-purchase programs – and, thus, an even bigger expansion of the balance sheet – or merely a redirection of the current purchases.
Regardless, the balance sheet continues to grow. Every week, the Bank of Canada is committed to purchasing at least $5-billion of federal government bonds on the open market. It is also buying billions in provincial bonds along with federal and provincial treasury bills. It is, in effect (if not expressly in intent), indirectly helping bankroll governments through the crisis.
Which leads to another priority that Mr. Macklem signalled in his finance committee appearance: defending the Bank of Canada’s political 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,” he said in his opening statement to the committee.
In normal times, that’s not the kind of thing a Bank of Canada governor has to state; it’s pretty much a given in this country. Bur as long as the central bank is in the business of buying government debt, the question of whether the bank has crossed a line and compromised its independence is one that Mr. Macklem will have to confront.
It’s just one of many things that Mr. Macklem will have to face head-on in his first several months on the job. His communications work is about to ramp up fast: a speech and news conference next Monday, then the quarterly Monetary Policy Report in mid-July, the most anticipated document from the central bank in years. He’s shown early that he doesn’t lack confidence, but the task ahead is huge, and there’s little time to ease into it.
We’ll get to know Tiff Macklem a lot better in the coming weeks.
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