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MNI INTERVIEW: Local Debt Biggest Challenge To China Since 90s
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China should issue a total of up to CNY10-12 trillion in treasury bonds over three to four years to bail out local governments, one of the country’s most prominent economic advisors told MNI, calling for the same level of determination officials brought to dealing with non-performing bank loans in the 1990s.
Shanghai University of Finance and Economics Professor Yao Yang said the central government should issue up to CNY4 trillion in special treasuries annually during this effort. Bailing out local governments would permit them to settle outstanding payments which are the cause of chains of indebtedness between companies which he says is paralysing local economic activity.
While Yao does not expect his recommendations for local liabilities or the national property sector to be acted upon in the near term, he describes addressing local fiscal liabilities as the most significant economic issue facing China. He draws parallels between the present moment and the late 1990s banking crisis, when he said the economy came closest to collapse in modern times.
“The entire economy is grinding to a halt,” said Yao, who has participated in meetings with President Xi Jinping and former Premier Li Keqiang. The “triangular debt” between large-scale enterprises whose origins lie in local government liabilities totals about CNY30 trillion, he said.
A previous CNY12 trillion package in late 2024 aimed at regularising liabilities which local governments had hidden off-balance sheet in order to get around financing limits has had the effect of increasing the fiscal burden on local administrations, said Yao, who believes that much of the debt should instead have been written off.
The package included raising local governments’ debt ceiling by CNY6 trillion to swap out the hidden debt, as well as allocating an annual CNY800 billion in local special bonds for five years. The local government funding vehicles would have been technically registered as corporate defaults if they had been allowed to fail, noted Yao, but instead they have been linked to local government books.
In the event 12 provinces received most of the official support and were able to roll over and extend debt maturities to 20-30 years, with remaining regions having to raise their own funds for repayments, he added.
“Every country has to clean up its debt roughly every 20 years with the backdrop of a credit-based economy,” said Yao, who argues that the need to alleviate debt which impedes central government objectives overrides concerns over moral hazard.
At least 80% of local governments’ total debts are backed by tangible assets, many of which are currently idle, noted Yao. (See MNI: China's Investment Likely To Decline In 2026 - Advisors)
“If the central government could allow asset management companies to step in and sell off these high-quality assets, there is plenty of capital in the market to absorb them,” he said.
The best way to curb disorderly borrowing by local governments is to compel administrations at all levels to publish their balance sheets for public scrutiny, according to Yao. Such a reform was mentioned during the Third Plenary Session of the 20th CPC Central Committee but has proven virtually impossible to advance, he added.
REAL ESTATE
Yao also has suggestions for dealing with China’s struggling property market.
A national-level entity could acquire properties to provide public rental housing, especially those subject to judicial auctions, and could be funded by issuance of CNY2-3 trillion of corporate bonds, he suggested.
"If the central government puts the money on the table, housing prices would stabilise or even see a slight rise, with the entity possibly turning a profit at the end,” he said.
Over 700,000 foreclosed properties were listed last year, many of which were selling at half of market price, constantly eroding market confidence at the margins, said Yao. These properties should be purchased as soon as possible to reduce disruption to the market, he said.
Yao rejected suggestions that the housing market is in the early stages of a recovery, adding that the current increase in second-hand housing transactions with falling prices has characteristics of a fire sale.
Sep-23 11:35
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
The Swiss National Bank looks set to keep monetary policy unchanged on Thursday, holding the policy rate at 0%, but following on from hikes at leading G7 central banks in recent weeks, the likely upward revision of inflation forecasts could signal monetary policy tightening is approaching in Switzerland too.
Futures markets currently see a probability of around 50% of a 25 basis-point rate hike at the December meeting, and such a move is fully priced in by the end of March 2027.
Recent comments from SNB President Martin Schlegel have been seen as a shift in a hawkish direction and policymakers in Zurich have not pushed back on the move in market pricing.
Swiss inflation rose to 0.8% year-on-year in August, above the SNB’s estimate for the average rate in Q3 2026, with a continued rise in fuel prices pointing to further increases in the coming months, perhaps pushing the consumer gauge above 1% y/y for the first time since the summer of 2024. These factors should be reflected in the forecasts.
Together with the impulse from energy prices, consumer prices could also face demand-side pressures after economic growth in the first half of 2026 exceeded expectations. A pick-up in new orders alongside resilient foreign demand point to GDP growth still at an above-potential rate in H2 2026.
CURRENCY MOVES
Recent franc weakness risks pushing imported inflation higher. Barring favourable energy price shocks or severe adverse shocks to growth, analysts at EFG says "it would not be surprising if the SNB adopted a less expansionary monetary policy before the end of 2026."
The SNB has two tools at its disposal to tighten financial conditions: the policy rate and foreign exchange market interventions. The SNB's primary tool is the policy rate, but the SNB has used the FX markets historically to influence the exchange rate and thereby adjust its monetary policy stance. Normally, FX activity was meant to counter franc appreciation but -- as in 2022-23 -- the SNB has also used intervention to tighten financial conditions.
"It is highly likely that the SNB will keep rates at 0% at its upcoming meeting on Sept 24. The SNB’s likely upward revision of inflation forecasts will signal that a monetary
policy tightening is approaching in Switzerland too," said GianLuigi Mandruzzato, senior economist at EFG Bank.
The Riksbank is generally expected to hold its policy rate at 1.75% on Thursday, though it is expected to raise its inflation forecasts given persistently high energy costs, and analysts anticipate an increase in its rate path to indicate a higher probability of a hike before year end than the 50% mentioned in June.
The Bank has held rates unchanged since its cut in September 2025. Inflationary pressures have been weaker than in many other advanced economies, with the target CPIF inflation measure consistently below 2%. Annual CPIF ex-energy inflation fell from 0.6% to 0.5% in August.
The Riksbank's estimate of the long-run neutral rate is between 1.5% and 3.0%, locating the current policy stance towards the bottom of the range, but the latest rate path trends slightly upward. The persistence of the Middle East conflict and associated increases in energy prices remain in focus, and in August, the Board assessed "that the probability of a rate increase later this year remains."
This guidance could be strengthened by adding a line stating that a rate hike this year was now seen as likely.
In June, Governor Erik Thedeen had said the chances of a hike were about 50/50. (See MNI INTERVIEW: 50/50 Hike Chances Due To Iran Doubts-Thedeen)
The Riksbank’s Executive Board, however, has been split, making agreement on guidance trickier. Deputy Governor Anna Seim, at the hawkish end, could dissent and vote for a hike this month while on the other side Deputy Governor Per Jansson said at the August meeting that the deterioration in the geopolitical outlook presented primarily a communication challenge and that the deterioration in the inflation outlook was slight.
Sep-22 15:31
Analysts are split down the middle as to whether Norges Bank will raise its key policy rate from 4.25% at its Sept 24 meeting, as it balances a deteriorating geopolitical outlook and higher energy prices against softening domestic activity.
While Norges Bank said at its last meeting that a further rate increase "may still become necessary," it has not specified timing, and Norway's policymakers have steered away from meeting-specific guidance since catching analysts off guard with their May hike.
If the Bank's policy committee shares the market consensus that another hike remains likely, then there would seem to be little value in delay at a time when concerns over higher energy costs have helped prompt tightening at the Federal Reserve, the European Central Bank and the Bank of Japan.
The market curve has fully priced in a hike by end-2026, with the next likely opportunity coming at the December meeting.
But inflation has surprised to the downside amid signs of the economy cooling. The central bank's own Regional Network business survey found that, after picking up through 2025, growth has slowed this year, with output expected to rise just 0.3% in Q3 and Q4. On the core CPI-ATE target measure, inflation dipped to 2.7% in June and July before rising to 3.0% in August, still below Norges Bank's 3.3% forecast.
The policy rate is already in restrictive territory, with Norges Bank's most recent estimate of the neutral rate lying in a range between 2.25% and 3.75%. (See MNI INTERVIEW: Norges Head Sees Rate Hike Despite Iran Deal)
Norges Bank's most recent quarterly rate path was consistent with a little more than one 25 basis point hike. The new monetary policy report on Tuesday will likely adjust the near-term rate path.
If the Bank doesn't hike, the near-term path would likely be lowered for the fourth quarter from just over 4.5%, in a signal that a rate hike this year is not a done deal. If they do hike the rate path is still likely to tilt upwards, leaving the door open to a further increase in either Q4 or Q1 next year. (See MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)
Sep-22 11:57
(Repeats story published earlier.)
Bank of Canada Governor Tiff Macklem told MNI he is comfortable giving limited forward guidance to explain the direction of monetary policy to Canadians, adding that volatility in investor bets about the path of rates over the last year reflects an unsettled time for the economy.
“That’s really markets at work. To the extent that they understand our objectives, to the extent they understand our reaction function, that assessment I think is a healthy thing,” Macklem said after a speech in Halifax, Nova Scotia on Monday. (See MNI TRANSCRIPT: Interview With Bank of Canada Governor Macklem)
“That doesn’t in the end mean that we don’t have to do the right thing. We can’t just let markets do it,” he said. “We have to take a judgement as to what we really need to do.”
Since President Donald Trump imposed the first round of tariffs last spring, Canadian investors and economists have priced in bets on two rate cuts, a hold into 2028, and as many as three hikes this year. There are only two meetings left this year and in recent weeks views have consolidated around a couple of hikes by early next year.
HUMBLE GUIDANCE
Decisions must come one meeting at a time and officials have a duty to explain the outlook to Canadians, he said. Those comments come as new Federal Reserve Chair Kevin Warsh says he won't give much forward guidance and instead wants to take signals from financial markets to help meet his inflation and full employment mandates.
“We have to talk about the future. We have to be humble about the fact the future’s unpredictable," Macklem said. "We have to think about the risks, and I think we need to be careful about giving too much forward guidance for the many of the reasons Chairman Warsh has outlined.”
“But you have to find that balance, and I’m generally comfortable with our balance,” he said.
Canadians need to understand that monetary policy acts with a lag to help them align the Bank's ultimate goal with what's going on at the moment, he suggested.
“The fact that inflation is above target now is not the key thing that feeds into our decision. The key thing is where do we think it’s going to be a year, a year-and-a-half from now, and do we need to change the interest rate to get it back to the 2% target over that horizon,” Macklem said.
GOING TO BE TROUBLE
Global bond yields have risen in recent weeks on signs that inflation and budget deficits are becoming bigger concerns, and that the continuing Iran war will push up gasoline prices in particular. Asked about his earlier warning that sovereign debt markets face risks as hedge funds take on a large share of the market, Macklem said there are some market problems that can be curbed while fiscal policy is a more fundamental question.
“There’s been a lot of issuance globally, there’s a lot of debt to absorb, and hedge funds have been doing it very efficiently,” Macklem said.
"In Canada as in other countries we are looking at, are there some things we can do to the infrastructure of the bond market that would improve its resilience given the fact that the buyers have shifted to more private sector and more hedge fund,” he said.
“Obviously, some countries have unsustainable fiscal policies. You’re not going to smooth those over with some new infrastructure," Macklem said. “Countries with unsustainable fiscal policies have to get fiscal policy on a sustainable track, or yeah, there’s going to be trouble.”
Sep-22 07:27
(Repeats story published earlier.)
The Bank of Canada is committed to meeting its inflation target even if recent supply shocks also dampen economic growth, and policymakers face hard tradeoffs in coming meetings, Bank of Canada Governor Tiff Macklem told MNI.
“In a world of supply shocks, it’s more difficult. We can’t stabilize output and inflation at the same time,” he said in an interview Monday following a speech in Halifax, Nova Scotia.
“The public’s expectations may not be realized as to what we can deliver," he said. "And in a more uncertain world, I mean let’s be frank, we’re going to make more mistakes.”
Veering from the inflation target would be "counterproductive" and "it is very important that central banks are clear-eyed about what monetary policy can do and what it cannot do," he said.
"We’re an inflation targeter. We’re going to do what we can to stabilize output, but our remit is clear. Our job is to bring inflation back to the 2% target.” (See MNI TRANSCRIPT: Interview With Bank of Canada Governor Macklem)
'FINELY BALANCED'
Asked if the next few meetings are close calls, he returned to the idea of conflicting pulls on inflation and growth and noted minutes from the last meeting showed a range of views on slack in the economy.
"You’re dealing with structural change, you’re dealing with supply shocks, so yeah there is going to be some diversity of views,” among Governing Council members, he said. “Even within my own mind, there’s going to be some finely balanced judgments.”
Canada's inflation was at the top of the central bank's target band at 3% for a second month in August, and earlier on Monday Macklem reiterated upside price risks have increased as the Iran war continues. Bets on the Bank hiking its 2.25% policy rate over next few meetings has climbed since the last decision as investors sensed Macklem was turning more hawkish, crude oil moved above USD100 a barrel and the Fed, Bank of Japan and ECB hiked.
“You’re seeing some correlation across central banks because we’re all dealing with high global energy prices, high gasoline prices, high diesel prices,” Macklem said when asked if he was feeling peer pressure to hike. "At the same time you’re seeing some differences because our economies are starting from different places.”
Canada's inflation is lower than the U.S. while growth is also slower he said. “We have a flexible exchange rate, that gives Canada the ability to have its own monetary policy, and gear monetary policy in Canada to the needs of the Canadian economy,” Macklem said.
CONSENSUS DECISIONS
The Bank's consensus decision-making helps the group make better calls, he said.
“We get to a consensus and I feel like we’ve heard from each person, and we’ve tested it and we’ve kicked it, that feels good,” Macklem said. “We’re not going to get every decision right but this makes sure that we’ve really you know tested it within the Council to the best of our ability.” (See: MNI BOC Watch:Hold; Upside CPI Risk Seen With Uncertain Growth)
Coming into the final year of a seven-year term, Macklem said he hasn't decided yet whether to become the longest-tenured leader since Gerald Bouey in the 70s and 80s.
“I am going to need to say something about my future plans. That point will come, we’re not there today,” he said. “I still got a good eight months. The Canadian economy, it’s at a very important juncture.” Some projects to get done include a new economic model and renewing the inflation-targeting deal with the government this year, he said.
Sep-22 07:27
Following is a transcript from an MNI interview Monday with Bank of Canada Governor Tiff Macklem. Some edits have been made for brevity and clarity.
Q: You’ve talked about a shock-prone world, and that the post Covid inflation challenge has been the biggest test of inflation targeting over its three decades in Canada. With those pressures, is monetary policy going to be less “heroic” from here?
A: “Yes, I think there is some truth to that. I think when the world is dominated by demand shocks, monetary policy can be the hero. Because it can stabilize the economy, stabilize growth, at the same time, bring inflation back to target. In a world of supply shocks, it’s more difficult. We can’t stabilize output and inflation at the same time. At the end of the day we’re an inflation targeter. We’re going to do what we can to stabilize output, but our remit is clear. Our job is to bring inflation back to the 2% target.”
“But that means there will be more disappointment with monetary policy. The public’s expectations may not be realized as to what we can deliver. The other reality is that in a more shock-prone world, in a world where there’s more structural change, international relations are more fraught, there’s going to be more uncertainty.”
“And in a more uncertain world, I mean let’s be frank, we’re going to make more mistakes.”
“Monetary policy needs to be forward looking, it’s harder to know what’s going to happen. Again, there may be more public disappointment with monetary policy.”
“I have talked a lot about operating in a more shock-prone world. And a lot of my focus has been on making sure the Bank is well prepared to operate in that more shock-prone world. If you look at the things we’ve done, a lot of them are connected around that theme. We’ve increased our outreach. It becomes ever more important when things are moving quickly, when things are more uncertain, getting better intelligence from what’s happening on the ground. How do businesses decision-makers see, how are they responding? Understanding how Canadians are experiencing inflation and experiencing shocks. Improving our economic models. Our economic models, the ones we have were more designed for a period that was dominated by demand shocks. Supply was pretty smooth, we didn’t have to devote a lot of attention to supply.”
“In a world of more supply shocks, you need a richer supply side in your model. You need to understand more of the connectivity between sectors. Because if you’ve got a supply problem in one sector, if that sector’s not very connected to other things, ok, it’s not good for that sector but it’s probably not hugely significant for the whole economy. But if that sector’s very connected to the rest of the economy, then the spillovers are bigger and it becomes much more macro significant.”
“Decision making, bringing in a couple of external deputy governors, broaden our perspective, broaden our expertise base. Having a press conference at every monetary policy decision. When the world’s moving faster, I think it’s important that we explain every policy decision.”
“Introducing a Summary of Deliberations has been an opportunity to elaborate more on how the Governing Council is chewing through the data, what is foremost on our mind, where is there some diversity of views. Those things have all been designed to manage better in this more shock prone world.”
Q: The IMF Managing Director said at Jackson Hole there should be no monetary policy “cowboys” bailing out bad fiscal policy. Is there danger that monetary policy will not just be less than heroic, but adding to a bad policy mix?
A: “Where the economy is going through structural adjustment, that’s changing the capacity of the economy to produce without generating inflation. That’s not something that monetary policy should lean against. We have a role to lean against cyclical downturns, because those tend to put downward pressure on inflation. But where there’s structural change, which we saw in 2025, I mean U.S. tariffs made the border thicker. There’s nothing monetary policy can do about that.”
“Yes part of the adjustment was cyclical and we did lower rates, but part of it was structural. The cost of doing business with the United States is higher, and unfortunately that’s just a new reality for the Canadian economy. It means exports will start to grow again, but they will be on a lower path, and monetary policy can’t fix that, and it shouldn’t try. Because if it does, we’re going to compound the problem with inflationary pressures.”
“In this world of more supply shocks, I think it is very important that central banks are clear-eyed about what monetary policy can do and what it cannot do. And also we do our best to try to explain to Canadians, explain to our citizens, what monetary policy can and cannot do. Because if we try to do things that ultimately we shouldn’t be doing or will be counterproductive, that’s not going to do anybody any good.”
Q: The last time a governor served a second term or more than seven years was Gerald Bouey in the 70s and 80s. Are you looking to go retro and become a long-term governor?
A: “I am going to need to say something about my future plans. That point will come, we’re not there today. I still got a good eight months. The Canadian economy, it’s at a very important juncture. As I talked about today, you’re starting to see adaptation, we need to move from adaptation to more transformative change. At the Bank of Canada there’s some big things that need to happen. We’re bringing in a new model, we’re going to need to fully integrate that into our forecasting and risk assessment analysis. We need to renew our inflation-targeting agreement with the government of Canada. I’m fully focused on those things for now.”
Q: You started with Covid and QE, an inflation burst, the Ukraine war continues, and U.S. tensions. Do you really want a second round of that?
A: “It has been a turbulent time. It’s been a turbulent time for the Bank of Canada, but look, it’s been a turbulent time for every Canadian, every Canadian business, and I will say it has been a real privilege to serve as the governor through this period.”
“As I was going through the application process for governor, when I first put in my application it was actually before Covid … As I’m going through the process of course, Covid turns into Covid, the economy is closed. The bond market freezes. And I will admit my first reaction was ‘Oh my God, this job is going to be a nightmare.’”
“After I sort of got over the initial shock, I was like, I’ve got to get this job. I’ve gotta be there. I mean, this is the biggest thing happening in our economic lives, I don’t want to be looking on from the sidelines. It’s been challenging, but I’m using everything I’ve got, doing my very best for Canadians. Have we got everything right? No. But I think we’ve made things a lot better than they could have been, so I’m proud of that.”
Q: In recent days there have been interest-rate hikes in Japan, at the ECB and the Fed. Are you feeling peer pressure?
A: “You’re seeing some correlation across central banks because we’re all dealing with high global energy prices, high gasoline prices, high diesel prices. That’s impacting inflation in all our countries. At the same time you’re seeing some differences because our economies are starting from different places.”
“Comparing Canada and the United States as I mentioned in the Q&A at the speech, we got inflation back to 2%. We were there for a good year and a half. The U.S. didn’t. So, yes, inflation has gone up but it’s gone up from a lower base.”
“The other thing is our economy’s softer. So we’re all dealing with the same global shocks, and one of the great things about central banks is we actually don’t compete against each other. We’re all in this together, we do talk to each other regularly, share our analysis, share our thinking, and that certainly helps us all.”
“We have a flexible exchange rate, that gives Canada the ability to have its own monetary policy, and gear monetary policy in Canada to the needs of the Canadian economy. It’s certainly important to understand how other countries are reacting, why they are reacting, particularly when it’s the U.S.-- that has implications for Canada.”
“Those are all things we are going to take into account, but at the end of the day we’re going to do what we need to do to control inflation in Canada.”
Q: Are you now in a time when rate meetings are close calls?
A: “There’s a couple of things here that are going to mean that people have, there may be some diversity of views.”
“Faced with the negative supply shock, and inflation that’s too high, we can’t stabilize both output and inflation at the same time. The last Summary of Deliberations, there’s some diversity of views with how much slack there is in the economy, and how much that will slow or prevent the pass-through of higher energy prices into final prices, and ultimately CPI inflation. That’s not too surprising, you’re dealing with structural change, you’re dealing with supply shocks, so yeah there will be, there is going to be some diversity of views.”
“And even within my own mind, there’s going to be some finely-balanced judgments.”
“That’s the value of a council, that’s the value of bringing different expertise, different experience, different perspectives to the table. I like the consensus system because it forces all of us to actually listen to our colleagues. We can’t just show up, put our vote in, we have to reach a consensus.”
“As the Governor I’m kind of the shepherd that helps the table get to that consensus. And when we get to a consensus and I feel like we’ve heard from each person, and we’ve tested it and we’ve kicked it, that feels good. We’re not going to get every decision right but this makes sure that we’ve really, you know, tested it within the Council to the best of our ability.”
Q: Over the last year, we’ve seen economists and futures markets predict rate cuts, a rate hold into 2028, as many as three rate hikes this year. How does market debate feed into the Bank’s thinking? Kevin Warsh for example has said he want to rein in forward guidance about rates to get a pure market signal.
A: “The fact that the market expectations for monetary policy have moved around quite a bit to use your words, is that economic events have been happening. And the market is reassessing what they think the central bank’s going to do. That’s really markets at work. To the extent that they understand our objectives, to the extent they understand our reaction function, that assessment I think is a healthy thing.”
“That doesn’t in the end mean that we don’t have to do the right thing. We can’t just let markets do it. If markets are pricing something because they’re expecting that we’re going to need to do what we need to do to bring inflation back to target, if we don’t do it, they will reassess. We have to take a judgement as to what we really need to do.”
“With respect to this discussion around forward guidance, you’ve heard me say it on almost every meeting: we’re going to take our decisions one meeting at a time.”
“Having said that, we have to be forward looking. Monetary policy works with a lag. We can’t explain our current decisions without explaining our view of the future. The fact that inflation is above target now is not the key thing that feeds into our decision. The key thing is where do we think it’s going to be a year, a year-and-a-half from now, and do we need to change the interest rate to get it back to the 2% target over that horizon.”
“We have to talk about the future. We have to be humble about the fact the future’s unpredictable. We have to think about the risks, and I think we need to be careful about giving too much forward guidance for the many of the reasons Chairman Warsh has outlined. But you have to find that balance, and I’m generally comfortable with our balance.”
Q: You’ve warned about the growing role of hedge funds in Canada’s sovereign debt market. But you’re also the government’s “fiscal agent.” Is there a point where some kind of action may be needed?
A: “This is not just an issue in Canada, it’s an issue globally, and as chair of the vulnerabilities committee of the FSB this is something we’ve been spending quite a bit of time on. In Canada as in many other countries, hedge funds have been taking a growing proportion of government debt, and in many respects that’s a good thing. There’s been a lot of issuance globally, there’s a lot of debt to absorb, and hedge funds have been doing it very efficiently.”
“There are some features though about the way that they are doing that, that make us worry that the system could be becoming more vulnerable. In particular, hedge funds tend to fund a lot of this using very short-term often one-day repo funding. A lot of that’s with zero haircuts. So if there were to be a bout of severe interest-rate volatility and the haircuts on repo were to go up, all of a sudden those trades could be out of the money and their demand could shrink rapidly. Given that they have a big presence in the market that could be very disruptive."
"In Canada as in other countries we are looking at, are there some things we can do to the infrastructure of the bond market that would improve its resilience given the fact that the buyers have shifted to more private sector and more hedge fund?”
“Obviously, some countries have unsustainable fiscal policies. You’re not going to smooth those over with some new infrastructure. Countries with unsustainable fiscal policies have to get fiscal policy on a sustainable track, or yeah, there’s going to be trouble.”
Q: There was some political and public anger over perceptions that QE was "printing money." It was also a large program. Does there need to be more oversight in future?
A: “We produced what I think at least is a very comprehensive report, reviewing our use of exceptional monetary policy tools through Covid, both QE and exceptional forward guidance.”
“The first thing I would underline is that let’s not forget just what a severe hole the economy was in, in the depths of Covid. When I started as Governor, GDP was minus 15%. I think it got revised down a little bit.”
“When you talked to the experts, they told us that there would be multiple waves of Covid. They turned out to be right about that.”
“We’ve done the analysis, it did pull the longer-term yields down. And that helped the economy get through this and recover faster. Did we get everything right? Clearly we didn’t. When we came out of Covid, demand recovered way faster than supply, and there were inflationary consequences of that and we had to reverse course very quickly.”
“Fortunately we were I think the first major central bank to end QE, we started unwinding earlier than others. But there are some lessons through that episode. One lesson is we need to do a better job distinguishing between large-scale bond purchases that are in place to restore market functioning, versus large scale bond purchases that are basically a form of stimulative monetary policy.”
“The large-scale asset purchases, the bond market was closed. It had to be restarted.”
“Certainly by the time we got to the summer, that was restored, markets were functioning. But having not distinguished clearly enough, the exit strategy wasn’t as clear as it could have been.”
“The other lesson from these things is, in the moment, you’re in an emergency, you’re really thinking about the current emergency. You’re not thinking so much about okay, what about when we’re out of the emergency? An important lesson is, you need to be clear about the conditions under which you’re doing it, and you need to be clear about the exit strategy when those conditions hold. If you’re clear up front, then the exit can be better.”
“There’s always been a very high bar for QE in this country. We’ve only ever used it once, and we used it in the biggest economic calamity we’ve had since the Great Depression. It does work but it certainly has risks and I think the bar for using it should remain very high.”
Sep-22 07:25Bank of Canada Governor Tiff Macklem told MNI he is comfortable giving limited forward guidance to explain the direction of monetary policy to Canadians, adding that volatility in investor bets about the path of rates over the last year reflects an unsettled time for the economy.
“That’s really markets at work. To the extent that they understand our objectives, to the extent they understand our reaction function, that assessment I think is a healthy thing,” Macklem said after a speech in Halifax, Nova Scotia.
“That doesn’t in the end mean that we don’t have to do the right thing. We can’t just let markets do it,” he said. “We have to take a judgement as to what we really need to do.”
Since President Donald Trump imposed the first round of tariffs last spring, Canadian investors and economists have priced in bets on two rate cuts, a hold into 2028, and as many as three hikes this year. There are only two meetings left this year and in recent weeks views have consolidated around a couple of hikes by early next year.
HUMBLE GUIDANCE
Decisions must come one meeting at a time and officials have a duty to explain the outlook to Canadians, he said. Those comments come as new Federal Reserve Chair Kevin Warsh says he won't give much forward guidance and instead wants to take signals from financial markets to help meet his inflation and full employment mandates.
“We have to talk about the future. We have to be humble about the fact the future’s unpredictable," Macklem said. "We have to think about the risks, and I think we need to be careful about giving too much forward guidance for the many of the reasons Chairman Warsh has outlined.”
“But you have to find that balance, and I’m generally comfortable with our balance,” he said.
Canadians need to understand that monetary policy acts with a lag to help them align the Bank's ultimate goal with what's going on at the moment, he suggested.
“The fact that inflation is above target now is not the key thing that feeds into our decision. The key thing is where do we think it’s going to be a year, a year-and-a-half from now, and do we need to change the interest rate to get it back to the 2% target over that horizon,” Macklem said.
GOING TO BE TROUBLE
Global bond yields have risen in recent weeks on signs that inflation and budget deficits are becoming bigger concerns, and that the continuing Iran war will push up gasoline prices in particular. Asked about his earlier warning that sovereign debt markets face risks as hedge funds take on a large share of the market, Macklem said there are some market problems that can be curbed while fiscal policy is a more fundamental question.
“There’s been a lot of issuance globally, there’s a lot of debt to absorb, and hedge funds have been doing it very efficiently,” Macklem said.
"In Canada as in other countries we are looking at, are there some things we can do to the infrastructure of the bond market that would improve its resilience given the fact that the buyers have shifted to more private sector and more hedge fund,” he said.
“Obviously, some countries have unsustainable fiscal policies. You’re not going to smooth those over with some new infrastructure," Macklem said. “Countries with unsustainable fiscal policies have to get fiscal policy on a sustainable track, or yeah, there’s going to be trouble.”
Sep-21 23:19The Bank of Canada is committed to meeting its inflation target even if recent supply shocks also dampen economic growth, and policymakers face hard tradeoffs in coming meetings, Bank of Canada Governor Tiff Macklem told MNI.
“In a world of supply shocks, it’s more difficult. We can’t stabilize output and inflation at the same time,” he said in an interview Monday following a speech in Halifax, Nova Scotia.
“The public’s expectations may not be realized as to what we can deliver," he said. "And in a more uncertain world, I mean let’s be frank, we’re going to make more mistakes.”
Veering from the inflation target would be "counterproductive" and "it is very important that central banks are clear-eyed about what monetary policy can do and what it cannot do," he said.
"We’re an inflation targeter. We’re going to do what we can to stabilize output, but our remit is clear. Our job is to bring inflation back to the 2% target.”
'FINELY BALANCED'
Asked if the next few meetings are close calls, he returned to the idea of conflicting pulls on inflation and growth and noted minutes from the last meeting showed a range of views on slack in the economy.
"You’re dealing with structural change, you’re dealing with supply shocks, so yeah there is going to be some diversity of views,” among Governing Council members, he said. “Even within my own mind, there’s going to be some finely balanced judgments.”
Canada's inflation was at the top of the central bank's target band at 3% for a second month in August, and earlier on Monday Macklem reiterated upside price risks have increased as the Iran war continues. Bets on the Bank hiking its 2.25% policy rate over next few meetings has climbed since the last decision as investors sensed Macklem was turning more hawkish, crude oil moved above USD100 a barrel and the Fed, Bank of Japan and ECB hiked.
“You’re seeing some correlation across central banks because we’re all dealing with high global energy prices, high gasoline prices, high diesel prices,” Macklem said when asked if he was feeling peer pressure to hike. "At the same time you’re seeing some differences because our economies are starting from different places.”
Canada's inflation is lower than the U.S. while growth is also slower he said. “We have a flexible exchange rate, that gives Canada the ability to have its own monetary policy, and gear monetary policy in Canada to the needs of the Canadian economy,” Macklem said.
CONSENSUS DECISIONS
The Bank's consensus decision-making helps the group make better calls, he said.
“We get to a consensus and I feel like we’ve heard from each person, and we’ve tested it and we’ve kicked it, that feels good,” Macklem said. “We’re not going to get every decision right but this makes sure that we’ve really you know tested it within the Council to the best of our ability.” (See: MNI BOC Watch:Hold; Upside CPI Risk Seen With Uncertain Growth)
Coming into the final year of a seven-year term, Macklem said he hasn't decided yet whether to become the longest-tenured leader since Gerald Bouey in the 70s and 80s.
“I am going to need to say something about my future plans. That point will come, we’re not there today,” he said. “I still got a good eight months. The Canadian economy, it’s at a very important juncture.” Some projects to get done include a new economic model and renewing the inflation-targeting deal with the government this year, he said.
Sep-21 23:15About
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