Debt danger ahead if interest rates outpace growth – Financial Post Op-Ed

A couple of weeks back, Jack Mintz warned Financial Post readers that governments that think low interest rates will let them keep borrowing big are on a dangerous path. As he pointed out, the presumption that deficits are sustainable depends on the rate of growth of the economy exceeding the interest rate. Drilling down, if a government borrows to pay all its interest, its debt will grow at the interest rate. If the economy grows faster than that, the government’s debt-to-GDP ratio can fall even if it also borrows to pay for some of its program spending. But if the interest rate is greater than the rate of economic growth, the government must cover all its program spending with taxes, and then some. Otherwise, its debt grows…

Should the Bank of Canada’s interest rates go any lower? – Financial Post Op-Ed

Last week the Bank of Canada decided not to change its target for the “overnight rate” of interest at which lending takes place among large financial institutions. It was a non-move that had extra significance in light of recent speeches by members of the bank’s Governing Council. Statements by Gov. Tiff Macklem and Deputy Gov. Paul Beaudry before Christmas had led to speculation about the possibility of a “micro-cut,” a cut in the target overnight rate of less than 25 basis points, if weak economic conditions warranted such a move. With the bank now predicting negative economic growth this quarter, such a cut might have seemed justified.

But it didn’t happen. To us, this time, that was the right call. Here’s why.

First,…

Bank of Canada Should Hold Overnight Rate at 0.25 Percent, Maintain Government Bond Purchases: C.D. Howe Institute Monetary Policy Council

January 14, 2021 – The C.D. Howe Institute’s Monetary Policy Council (MPC) recommends that the Bank of Canada keep its target for the overnight rate, its benchmark policy interest rate, at 0.25 percent at least until January of 2022. A majority of MPC members also recommends that the Bank of Canada maintain its current quantitative easing purchases of Government of Canada bonds.

The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2 percent inflation target. William Robson, the Institute’s CEO, chairs the Council. The Council’s principal recommendations are about the overnight rate target. Members make recommendations for the Bank of Canada’s upcoming interest-rate…

For the Record: Assessing the Monetary Policy Stance of the Bank of Canada

How much has the COVID-19 pandemic damaged the economy? – Globe and Mail Op-Ed

Along with much of the world, Canada’s economy has suffered from the COVID-19 pandemic and other events in 2020, notably the shock to global oil markets. How badly? An examination of the immediate data and longer trends indicates significant damage, with a lengthy recovery period ahead.

Let’s start with labour markets, where there are signs of recovery but also growing evidence of damage. The unemployment rate exploded to nearly 14 per cent from 6 per cent during the shutdown from March to May. The rate has dropped steadily since as many displaced workers have been re-engaged, but the second pandemic wave and renewed shutdowns in many provinces have meant more job losses. Employment fell by 63,000 in December, and…

Fiscal dominance would hobble the Bank of Canada – Financial Post Op-Ed

The Bank of Canada did not surprise last week on its target for the overnight interest rate, which remains at 25 basis points and is expected to stay there until the economy fully recovers from the pandemic recession, sometime in 2023, according to the bank’s projections.

The real intrigue in the bank’s regular announcements these days surrounds its purchases of Government of Canada debt, and what they mean for its relationship with the federal government. Wednesday’s announcement left these purchases unchanged at $4 billion per week. However, this announcement requires a deeper dive, coming as it does after the federal government’s fall economic statement laid down substantial deficits and no fiscal anchor on the horizon.

Ambler, Kronick – Three Reasons To Think Inflation Could Return Sooner Than Later

Climbing Out of COVID

Paul Jenkins – The Bank’s Balance Sheet: A Perspective

Luc Godbout – Fiscal Anchors, Compasses, Golden Rules, Guardrails Or Targets – By Any Name, Let’s Get One

Ambler, Kronick – Choreography For The Bank Of Canada’s Delicate Dance

Inflation may be back sooner than you think – Financial Post Op-Ed

Last week’s quarterly “Monetary Policy Report” (MPR) from the Bank of Canada sketched the long and likely winding road Canada’s economy needs to travel before it gets back to where it was pre-pandemic. And, with it, the long road inflation will have to take to return to its target rate of two per cent.

At the same time, the bank announced it would hold the target overnight rate of interest at its effective lower bound of 25 basis points (i.e., 0.25 per cent), “until economic slack is absorbed so that the two per cent inflation target is sustainably achieved,” which the bank estimates will not happen until sometime in 2023.

This amounts to “forward guidance” about the path of the overnight rate target — an effort to reduce…