Bank of Canada could have been clearer about pandemic measures: review

Bank of Canada signage is shown in Ottawa on Monday, Oct. 21, 2024. THE CANADIAN PRESS/Sean Kilpatrick

OTTAWA — Extraordinary measures taken by the Bank of Canada during the pandemic could have been communicated more clearly, an internal review has found, including an explanation of how the actions would be wound down after the crisis.

The report Friday also noted the bank significantly underestimated the strength and persistence of inflation in 2021 and early 2022, something governor Tiff Macklem had previously acknowledged.

Macklem said the review will help the central bank be better prepared and more effective should Canada face another similar economic crisis.

“The Bank of Canada is a learning institution, and we must take on board the lessons from this unprecedented experience,” Macklem said in a news release.

In addition to slashing its key interest rate to 0.25 per cent in the early days of the pandemic, the Bank of Canada bought billions worth of bonds. At first, the purchases were designed to keep financial markets functioning. Later, the purpose was to provide monetary stimulus.

The review said the bank could be clearer about the limited circumstances under which it would make such large-scale asset purchases and better distinguish between when it is intended to restore market functioning and when it’s a stimulus measure.

In response to the review, the central bank said it should also clearly communicate the conditions under which it would end significant forward guidance on the path for interest rates.

Derek Holt, head of capital markets economics at Scotiabank, said the central bank’s assurance that the bar for using these exceptional monetary policy tools should remain very high was a consistent one.

He noted that the merits of using quantitative easing in the pandemic were hotly debated.

“They have a lot of policy tools at their disposal and it’s unclear to me that QE was a useful experiment in Canada relative to the distortions and management time that was spent on it,” Holt wrote in an email.

Pedro Antunes, chief economist at the Conference Board of Canada, said the central bank’s actions during the pandemic came as the economy was essentially shutting down.

“I think the bank did very well to put in place a lot of programs that encouraged, essentially, and made capital as cheap as possible so that we wouldn’t seize up the economy,” he said.

However, Antunes noted the review did not address how low interest rates affected the housing market as mortgage rates fell at a time when people had few other outlets for spending and home prices took flight.

“I think the fact that we allowed home prices to increase by so much so quickly had repercussions at the time and certainly had many repercussions down the road in terms of affordability,” he said.

The Bank of Canada’s review said several factors contributed to runaway inflation in 2021 and 2022, including unique impacts related to the pandemic, Russia’s invasion of Ukraine, changes in consumer spending patterns and higher-than-usual pass-through of costs to prices.

The bank did not fully anticipate the speed of the rebound in demand relative to supply, the report said.

“With strong demand and limited supply, firms may have been less concerned about losing customers, leading to greater pass-through of costs,” the report said.

However, the bank said its analysis indicated that its policy actions on their own did not push inflation significantly above two per cent.

An external review of the bank’s report by a panel of experts including former Bank of Spain governor Pablo Hernandez de Cos, professor Kristin Forbes of MIT’s Sloan School of Management and University of Calgary professor Trevor Tombe agreed on the need to improve communication and transparency, particularly around the use of unconventional tools.

“All in all, there are a number of ways by which the bank could continue to refine and explore accessible methods to communicate its policy decisions,” the external review said.

“This is particularly important for the new and unconventional tools which were introduced in exceptional circumstances, but which may need to be relied upon again.”

This report by The Canadian Press was first published Jan. 17, 2025.