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Be vigilant, not alarmist about BoC balance sheet: economist

Stephanie Hughes
·Financial Journalist
·3-min read
Bank of Canada Governor Tiff Macklem holds a news conference at the Bank of Canada in Ottawa, Canada, July 15, 2020. Adrian Wyld/Pool via REUTERS
REUTERS

The Bank of Canada’s ballooning balance sheet has raised eyebrows this year, but one economist says while concern is warranted “we shouldn’t be alarmist.”

“When confronted with crisis, you don't hold back, you attempt to crush it with a large policy response up front,” Brett House, the vice president and deputy chief economist at Scotiabank, told Yahoo Finance Canada.

This upfront response at the onset of the pandemic began in April with billions of asset purchases, marking the country’s first push into quantitative easing. Soon after, the central bank committed to purchasing about $5 billion per week in its liquidity program. Through the program the bank has purchased about $156 billion in government bonds as of late October.

The balance sheet growth is eye-popping, but House says any major purchasing program would look alarming compared to how Canada handled financial crises in the past.

“We certainly expanded the Bank of Canada's balance sheet, naturally, in response to the lockdown in Q2,” said House, adding that Canada had never before engaged in quantitative easing even during the 2008 crisis. “So, anything we would do looks big compared to where we've been before.”

A Crescat Capital LLC chart, compiled with Bloomberg data, shows the Bank of Canada had by far the biggest increase in balance sheet assets to nominal year-over-year GDP growth versus other central banks.
A Crescat Capital LLC chart, compiled with Bloomberg data, shows the Bank of Canada had by far the biggest increase in balance sheet assets to nominal year-over-year GDP growth versus other central banks.

The Bank of Canada currently sits on CAD $529 billion in total assets while the U.S. Federal Reserve has approximately USD $7.2 trillion on hand. A chart from Crescat Capital, based on Bloomberg data, shows that the bank’s balance sheet asset growth outpaced other central banks in relation to year-over-year GDP growth with a 456 per cent surge.

But House says these moves from the bank are not out of step with the monetary policy deployed by other developed markets in response to the crisis, despite the jarring growth. In relative terms, House argues that Canada has moved more or less in tandem with other major central banks.

“The entire lexicon that’s being employed to somehow cast what Canada is doing as exceptional, compared to either with recent history or with what other central banks have done, is misplaced.”

When measuring the country’s economic standing amid the pandemic, House looks to activity across sectors. “We have to watch how the distribution of the recovery continues to evolve and we need to make sure that support both on the fiscal side and on the monetary policy side is tuned in a way to bring about equitable or inclusive recovery.” Sectors like financial services, real estate, utilities and retail are bouncing back from deep pandemic impacts suffered months ago. However, House adds that the travel sector, hospitality, food service and the arts are taking longer to find their footing.

The Bank’s Next Moves

Canada’s bank scaled back on some of its purchase programs this month, like the Bankers’ Acceptance Purchase Facility (BAPF) and the Canada Mortgage Bond Purchase Program (CMBP). In September, Bank of Canada Governor Tiff Macklem signalled that the quantitative easing will continue until “the recovery is well underway”.

The bank will provide a monetary policy update Wednesday, which could present a stance on whether there will be a shift in inflation targeting, says House.

“We may see some reformulation of the suite of asset purchase programs, but we're certainly not going to see overall in the aggregate, a slowdown or deceleration in the pace by which they're continuing to purchase assets so long as they’re needed in order to keep yields low.”