Bank of Canada Governor Tiff Macklem repeatedly told a parliamentary committee that the central bank isn’t in the business of bankrolling the federal government’s soaring deficits, insisting the government isn’t in danger of insolvency without the bank’s continuing purchases of billions of dollars a week of government debt.
“We’re not financing the government,” Mr. Macklem told the House standing committee on finance in a hearing Thursday. He repeated that sentence twice more to underline his point.
Mr. Macklem was responding to questioning from Conservative MP Tamara Jansen, who pressed the Governor on the role the central bank’s program to purchase a minimum $4-billion a week of government bonds – a form of monetary policy called quantitative easing – is playing in the heavy debts the federal government has taken on in its massive spending measures during the COVID-19 crisis.
The government looks likely to exceed its estimated budget deficit of $343-billion for fiscal 2020-21 – which itself was 10 times the size of the previous year’s deficit
“Are you saying that you need to keep buying government debt – basically printing money – for Canada to remain solvent?” Ms. Jansen asked.
“No. That’s not what we’re saying at all,” Mr. Macklem countered.
He stressed that the QE program is intended to provide monetary stimulus in order to help the economy recover and return inflation to the central bank’s 2-per-cent target – not to finance the government’s debts.
“So what you’re saying is, you would not have to continue that [program] – we could remain solvent without it?” Ms. Jansen asked.
“That is what I’m saying,” Mr. Macklem responded.
He reiterated that the Bank of Canada has expressly committed to end its purchases under the program “once the recovery is well under way.” He noted this “will probably happen before” inflation reaches the central bank’s 2-per-cent target. He also repeated the bank’s forecast that inflation will sustainably return to the target sometime in 2023.
Although committee members asked him for a firmer timeline on ending the QE program, he declined to get more specific, citing the “high degree of uncertainty” in the course of the pandemic and, by extension, the outlook for the economic recovery.
“I’d love to be able to put this on a calendar for you,” he said. “I wouldn’t want to give you a false sense of precision.”
The opposition Conservatives, led by their finance critic, Pierre Poilievre, have been critical in recent weeks of the central bank’s bond program, under which it has purchased more than $175-billion in federal government debt since the program launched in April. In a recent interview with Bloomberg News, Mr. Poilievre suggested the Bank of Canada was in danger of becoming “an ATM for [Prime Minister Justin] Trudeau’s insatiable spending appetites.”
In total, the bank now holds about $280-billion in Government of Canada bonds – roughly one-third of the total federal bond market. Mr. Macklem played down concerns that the bank was taking on too large a footprint in that market.
“Other central banks have issued guidance that if the central bank holds more than 50 to 70 per cent, that could start to impair market functioning. The [U.S.] Federal Reserve has indicated that for them it would be about 60 per cent,” he said.
“So, we have quite a lot of room. Something in that range would be uncomfortable, [but] we have a long way to get there.”
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