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Tiff Macklem Assumes Bank of Canada Leadership, May Regret Doing So

Karl Schamotta May 1, 2020

Tiff Macklem will replace Stephen Poloz as Governor of the Bank of Canada in June. After an extensive search conducted by outside members of the Bank’s directors, Mr. Macklem was selected by the government to serve a seven-year term.

Markets were shocked, but not surprised by the announcement – the appointment process has led to surprises at least four times in recent history.

Many had expected Carolyn Wilkins, current Deputy Governor to win the position. She is arguably the most prominent Deputy in the Bank’s history, with an incredibly strong body of research behind her, and widely acknowledged skill in facing down tough questions from the media – and her appointment would have

But Mr. Macklem had been a favourite when Mark Carney left the role in 2013 and is the consummate central banker by any definition. He is currently Dean of the Rotman School of Management at the University of Toronto, and previously served as Senior Deputy Governor of the Bank of Canada from 2010 to 2014. Perhaps more importantly, Tiff was Associate Deputy Minister at the Department of Finance from 2007 to 2010, and chaired the international Standing Committee for Standards Implementation at the Financial Stability Board from 2009 to 2013.

He has extensive experience serving on the policy front lines during a financial crisis – and in cleaning up after one.

The Canadian dollar displayed no reaction as the announcement was made, but did sell off when Mr. Macklem discussed negative rates during the press conference. He said, “With respect to the effective lower bound at 0.25%, the Bank of Canada has elaborated a framework with unconventional monetary instruments, the possibility of using negative interest rates is included in that list. I think the reason it hasn’t been deployed is that, well, let me put it this way, there are some disruptive effects of going negative. It’s hard to explain to depositors why their deposits are shrinking in their account when they’re not taking any money out. And when you’ve already got a disrupted financial system, you may want to be hesitant about introducing a new source of disruption. So, when you look at the current situation, yes, I’m quite comfortable with the effective lower bound where it is.”

On balance, this suggests that he does not want to push rates into negative territory – but in our soundbite- and algo-driven financial markets, the effective impact has been to drive the exchange rate down by half a cent.

This underlines the unprecedented challenge Mr. Macklem will face as Governor. With central banks playing a critical role in fighting the COVID-19 crisis, his communication efforts will be carefully scrutinized, and any missteps will have material implications.

The global economy is experiencing the fastest and deepest shock since the Great Depression, commodity prices are plumbing historic lows, unemployment is surging – and Canadian household balance sheets remain woefully overleveraged.

He will also assume leadership just as the Bank ramps up its usage of new and unusual policy tools, including massive liquidity injections and purchases of federal, provincial and corporate debt. He will be forced to decide whether to take a “damn the torpedoes” approach – unleashing overwhelming aid now, while putting the financial system at risk in the longer run – or deploying policy more gradually, increasing stimulus efforts as the economic impact becomes clearer.

Arguably, an overpowering response by other major central banks helped avert a repeat of the Depression during the global financial crisis, but a normalization of policy has been difficult to achieve. Every increase in interest rates has been reversed in the face of market disruptions, and quantitative easing programs have been repeatedly wound down, only to be started up again. The world economy remains addicted to – and dependent upon – cheap liquidity, and this means that it remains vulnerable to new shocks. There’s little to suggest that this time will be different.

We wish him luck.

Karl Schamotta
Chief Market Strategist

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