The Bank of Canada’s approach to stimulating the economy through quantitative easing—a strategy popularized by institutions like the Federal Reserve and the European Central Bank during the 2008 financial crisis—is nearing its conclusion. On July 14th, the Bank announced a reduction in its weekly purchases of Government of Canada bonds from $3 billion to $2 billion. This adjustment reflects a growing confidence that economic growth will rebound over the next 18 months, justifying a move away from sustained stimulus.
The Bank’s shift is underscored by a revamped monitoring process, what the Bank now describes as its “dashboard.” Governor Tiff Macklem and his team are closely observing a range of key economic indicators, including the unemployment rate, labor force participation, full-time employment, the split between full-time and part-time workers, the participation of women in the workforce, the labor underutilization rate, hours worked, productivity, and business investment. These gauges provide a comprehensive view of the nation’s economic health. This heightened scrutiny extends to new indicators such as the labor underutilization rate, which measures those who are unemployed but who wanted a job and did not look for one, as well as hours worked.
Previously, the Bank was injecting significant amounts of liquidity into the market, a tactic that some, like Franklin Templeton Canada’s Tom O’Gorman, perceived as having created a somewhat “addictive” dynamic—a situation where central banks remain committed indefinitely, much like the “Hotel California.” By scaling back these purchases, the Bank signals a return to a more traditional approach, prioritizing sustainable growth over prolonged monetary stimulus. The commitment to reduce its bond holdings to zero by the end of the year while still wielding influence over interest rates speaks to a measured and cautious strategy.
Governor Macklem’s steadfastness is particularly notable in light of recent inflation reports. The U.S. Bureau of Labor Statistics released data indicating a 0.9% surge in June’s Consumer Price Index, the largest monthly increase since 2008. This rise, attributed to the rebound in the U.S. economy, prompted concerns about inflation exceeding the Federal Reserve’s 2% target. Similarly, the Bank of Canada is keenly aware of these international developments, acknowledging the potential for inflation to remain elevated. Despite these inflationary pressures, Macklem remains confident the current surge is temporary and will naturally subside. He has assured stakeholders that the Bank possesses the tools and mandate to control inflation if it proves persistent.
The Bank’s strategy is underpinned by a commitment to prioritizing employment over inflation, at least in the near term. This determination is evident in its projected interest rate trajectory, which anticipates a lift by the end of 2022. The Bank’s actions reflect a calculated risk, balancing the need for economic recovery with the imperative of maintaining price stability. The Bank’s measured approach, combined with its vigilant monitoring of the economic landscape, suggests a path toward sustainable growth and a return to its targeted inflation levels.
