In today’s economic progress report, Bank of Canada Governor Tiff Macklem reviewed economic developments since the publication of the Bank’s Monetary Policy Report (MPR) in July, while also providing guidance on the future of the quantitative easing (QE) program. The Governor began by acknowledging that economic growth was weaker than expected in the second quarter. This was primarily a result of weaker exports and a pullback in housing activity. Supply chain disruptions hurt production and weakened spending by consumers and business. That said, overall domestic demand grew at a healthy pace in the second quarter.
The Governor also focused in on the employment recovery, noting that job gains were solid in June and July. There was less unevenness in the labour market now, as hard-hit service sectors were seeing much-needed improvements. Still, the Bank has been hearing from some businesses that due to a lack of workers, it has been hard to keep up with the rebound in demand.
On inflation, Governor Macklem reiterated that base effects and supply disruptions were playing an important role in keeping inflation elevated. The Bank continues to expect that these factors will fade with time, but the persistence and magnitude of the impacts are uncertain. He said the Bank will be monitoring this closely.
Turning to QE, the Governor laid out the next phase for the program. He said that as the economy continues to recover, we will be “getting close to a time when continuing to add stimulus through QE will no longer be necessary”. The Governor did say we are not there yet, and that it will depend on future economic developments. The next phase for QE is the reinvestment phase, where the Bank will adjust the level of bond purchases to maintain the Bank’s overall holdings of Government of Canada (GoC) bonds roughly stable. While the Governor pointed out that the decisions to adjust the pace of bond purchases and raise the policy interest rate were distinct, it was “reasonable to expect” that when monetary stimulus needed to be reduced, the Bank’s first move would be to raise the overnight rate before allowing its holding of GoC bonds to decline.
Key Implications
Much like yesterday’s monetary policy statement, the Bank of Canada Governor Tiff Macklem downplayed the stumble in Canada’s economic recovery in the second quarter. He focused on the strength in domestic demand and employment as important reasons why the recovery will strengthen in the second half of the year.
The Governor spent much of his time laying out the next steps for the Bank’s quantitative easing program. He was keen to note that the transition to the reinvestment phase will be gradual, and the Bank will be clear in its communication. The time for the transition hasn’t come yet, but it is getting closer as the economy continues its upward trajectory.
