By Paul Vieira
OTTAWA--The next time the Bank of Canada executes extraordinary bond purchases during an economic crisis, it needs to be explicit about the rationale behind the large-scale acquisitions and set out exit conditions more closely tied to inflation expectations, according to a review of the central bank's pandemic-era policies.
Nevertheless, the review states the emergency programs launched at the start of the Covid-19 pandemic worked in stabilizing financial markets -- ensuring that households and businesses had access to credit -- and lowering longer-term borrowing costs. The review, conducted by central bank staff, also argued that the bond purchases -- known in market parlance as quantitative easing -- did not "on their own" help push inflation sharply above 2%, as some Bank of Canada critics contend.
"We must take on board the lessons from this unprecedented experience," Bank of Canada Gov. Tiff Macklem said in a statement. "This review is important for our accountability and will help us be better prepared and more effective" in the event of another crisis.
The Bank of Canada had previously defended its use of quantitative easing, citing research that indicated the level of gross domestic product rose by as much as 3% due to the pandemic-era emergency measures. Those measures incorporated bond buying to stabilize financial markets and lower longer-term borrowing costs, and provided explicit guidance on how long the central bank's main policy rate would remain near zero, or 0.25%. Macklem had said back in 2020 that the policy rate would stay at 0.25% until the economy's spare capacity was absorbed.
The central bank deployed quantitative easing for the first time in its history during the pandemic, and the bond purchases triggered criticism by lawmakers in Canada's Conservative Party for fueling the rapid rise in inflation and helping the Liberal government ramp up spending. An election must be held this year, no later than October, and the Conservatives hold a sizable lead, of up to 25 percentage points, over the Liberals in most public-opinion polls. Conservative Party leader Pierre Poilievre had previously promised that should he become prime minister, he would fire Macklem because of his failure to contain inflation. However, he has refrained from issuing that threat for some time.
The review said that should the Bank of Canada engage in extraordinary bond buying, officials need to "clearly delineate" whether the purchases are to ensure smooth market functioning or provide extra stimulus to the economy. If bond buying is needed for financial-stability reasons, the central bank should say that purchases would continue until certain liquidity measures, not economic indicators, are met.
Bond purchases made to add stimulus, or quantitative easing, should be accompanied by exit conditions tied to inflation expectations. During the Covid-19 pandemic, the central bank said bond purchases would continue "until the economic recovery is under way. But this left a lot of room for interpretation," the review said.
"While, in principle, QE programs could have contributed to the post-pandemic surge in inflation above target, the bank's estimates suggest that monetary-policy actions, including QE, did not, on their own, push inflation above 2%."
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
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