The Bank of Canada took unprecedented measures to counter the impact of the pandemic, with positive results, but it could have done better, by its own admission and in the opinion of a committee of independent experts.
Published at 6:00 a.m.
The Bank of Canada’s monetary policy during the pandemic period has earned it strong criticism, including that of having taken too long to raise its key rate and of having fueled inflation, in addition to having sent the wrong signals to Canadians.
Four years later, the leaders of the central bank accept a large part of these criticisms in their report published Friday and are committed to learning lessons from this unprecedented experience.
“This review is an important means of accountability for us and will help us be better prepared and more effective if Canada were to face another economic crisis like this,” commented the Governor of the Bank of Canada, Tiff Macklem.
A committee of independent experts commissioned by the bank to evaluate its review believes that the Bank of Canada did neither better nor worse than the central banks of other industrialized countries, but that it could have managed the situation better .
Like other central banks, the Bank of Canada reacted to the pandemic threat by reducing its key rate, from 1.75% to 0.25% in less than a month. At the same time, it massively injected liquidity into the financial system by purchasing Government of Canada bonds, called quantitative easing, something it had never done before.
In its self-review, the Bank of Canada maintains that these measures, including quantitative easing, “have not alone pushed inflation significantly above 2%.”
Information exchange
At the same time as the Bank of Canada was taking exceptional measures to lower interest rates and inject more money into the financial system, the federal government also intervened massively in the economy with very generous aid programs, like the Canada Emergency Response Benefit, which also fueled inflation.
The three experts, Pablo Hernández de Cos, former governor of the Bank of Spain, Kristin Forbes, professor at the MIT Sloan School of Management, and Trevor Tombe, professor at the University of Calgary, believe that the Bank of Canada would have had to have better exchanges of information with the federal government to avoid doing too much.
-A better exchange of information with the government would have made it possible to better balance the bank’s intervention, underlines the committee of experts, “even if these two policies (monetary and budgetary) should remain independent”.
These specialists also wonder if the bank could have lowered its key rate further, below the threshold of 0.25% which it considers a floor rate, as other central banks have done, rather than having massive use of quantitative easing.
“While rates below 25 basis points have significant downsides,” experts note, “are there situations where negative rates would be a more effective stimulus measure than quantitative easing? », they ask.
Contrary indications
The Bank of Canada was slow to raise its key rate and it is one of the central banks in the world which has raised it most vigorously, with unprecedented increases of 50 points and 100 points per decision. She was also among those who reduced it the fastest.
This more energetic increase raises questions about the reliability of the bank’s forecasts and the indications it gave to the market during the pandemic episode, according to the committee of experts.
During this chaotic period, the Bank of Canada for the first time used another tool, exceptional forward guidance, which was intended to provide greater clarity to the financial markets. In particular, she announced that the key rate would remain at 0.25% “until excess capacity in the economy is absorbed, so that the inflation target of 2% is achieved in a sustainable manner”.
These indications were interpreted by the markets and the public “as a broader guarantee” that rates would remain low for a long time. It didn’t happen like that and interest rates rose sooner than the bank had suggested.
The Bank of Canada has already improved its communications, notably by publishing the minutes of the discussions that lead to decisions on the key rate, and it is committed to doing better.
The committee that reviewed its report made several suggestions to improve the transparency of these activities, including allowing its leaders to vote individually on important decisions and providing better visibility on its future trajectory, in particular by using a dot chart like that of the American Federal Reserve.
