When Tiff Macklem returns to the central bank next month he'll face an immediate demand for smart answers
Even when you are returning to familiar territory, it’s desirable to ease into a new job for a few weeks. That won’t be the case for Tiff Macklem.
The newly-announced next governor of the Bank of Canada will have to hit the ground running when he succeeds Stephen Poloz in June. By then, the growing demand to restart Canada’s economy will be at a peak.
As he begins his seven-year term, the unprecedented challenges of the coronavirus pandemic create an unenviable to-do list.
Extending the BoC’s asset-buying program, interest rates, inflation; these will all require careful management, but there is likely to be more.
“We are going to be moving from damage control in the financial system and easing strains there, to try to stimulate a recovery,” CIBC economist Royce Mendes told Bloomberg. “And that’s going to need a more aggressive policy response. I think he’s going to have to do things like standard QE.”
Macklem knows that the current situation will mean taking bold responses that differ from the norm. But that is unlikely to include taking Canada into the realms of negative interest rates. He said Friday that 0.25% is as low as he would want rates to go.
"It's really critical that credit keep flowing, that (businesses) can borrow money to get them through this and a critical function of the Bank of Canada is to provide the liquidity to keep the financial system functioning," Macklem told CTV News.
Grew up at BoC
The pandemic-related recession is not a repeat of the challenges of the financial crisis, but the incoming governor will have tools at his disposal that were either used or discussed at that time.
And leading economists appear optimistic that Macklem has the qualities to do what’s required, combining his many previous years at the BoC, the finance ministry, and other major roles.
“He is the full package. He’s got the academic credentials, the experience in the private sector, central bank and business and is well-respected in a policy role,” RBC economist Craig Wright told Bloomberg.
The outgoing BoC governor is also convinced that Macklem is the right man for the job.
“Tiff grew up in this organization, and I know that like me, he will serve as a dedicated steward for the next generation of central bankers,” said Stephen Poloz, acknowledging that his successor’s capabilities mean the bank is in “solid hands.”
New textbook case
The current market conditions, the economic fallout from the pandemic, and the decisions made during the coming months and years, both by Macklem and other policymakers, will be referenced for decades.
“The current collapse in economic activity and the massive risk-off move in financial markets will be featured in textbooks for years to come,” wrote TD Economics’ James Orlando and Brett Saldarelli in a report Friday.
In their report, the economists warn of potential risk in corporate credit markets where the global rise in borrowing clashes with lower revenues which raise concern of corporates’ ability to service the debt.
They say that investors are demanding 17-19% premium to invest in these instruments. This is below the 20% premium of the oil price shock in 2015 and the 44% during the financial crisis.
At a press conference Friday, the new BoC governor noted that one of the most important things that the central bank needs to do is maintain sentiment.
“You need to restore confidence and I think when you look at what the Bank of Canada has done so far, when you look at the actions that the government of Canada has taken to provide a bridge to Canadians to the other side of this, these are bold unconventional policy responses that really have embraced this idea,” Macklem said.
