What Tiff Macklem’s own words can tell us about the Bank of Canada’s incoming governor

What Tiff Macklem’s own words can tell us about the Bank of Canada’s incoming governor
In the summer of 2002, the Bank of Canada published an article that described how the institution decides where to set interest rates.

“The key to a successful monetary policy,” wrote Tiff Macklem, then the central bank’s impressive young research chief, “is looking ahead to the most likely outcome and reacting promptly and appropriately to surprises, so that inflation is kept on target or brought back to target over a year or two.”

Macklem, now a distinguished veteran of global finance, will soon have the power to put those words into action, after being tapped by Prime Minister Justin Trudeau to take over as Bank of Canada governor when Stephen Poloz retires early next month.

He will be well prepared for the post. Macklem spent most of a three-decade career in Ottawa at the central bank, climbing to the post of senior deputy governor before departing in 2014 to run the University of Toronto’s Rotman School of Management.

The challenge will be one that no other governor has ever seen, however: Macklem is being tasked with crafting a response to the COVID-19 pandemic and the associated economic fallout. A good indication of how the new governor will steer Canada through one of its greatest crises may be his own words.

Macklem has experience with crises, having served as an associate deputy finance minister during the Great Recession a decade ago.

In an October 2010 speech in Montreal, Macklem’s first after returning to the central bank as senior deputy governor, he noted that the Bank of Canada had successfully calmed investors by offering forward guidance on the path for its key rate, something that has not taken place yet under Poloz.

It is, however, one of the unconventional tools the central bank could still use, in addition to its current large-scale bond-buying program.

“As Canada heads into a period where it will have to deal with an especially weak currency, high levels of debt and the overhang of an economic crisis, some Carney-era-type guidance might be just what the doctor ordered,” said Frances Donald, chief economist at Manulife Investment Management, referring to Mark Carney, Macklem’s former boss at the Bank of Canada.

About four years after he left the bank, the federal government also created the Expert Panel on Sustainable Finance, chaired by Macklem, and which last year turned in a final report with recommendations regarding the Bank of Canada.

The report suggested the central bank help lead efforts to incorporate climate risks in the federal supervision of financial institutions and in encouraging Canadian asset managers to review their “internal climate change competency.”

“We will be looking at climate change, along with a host of other major economic forces acting on the economy, to the extent that they affect inflation,” Macklem told reporters on Friday.

Macklem is well acquainted with the Bank of Canada’s inflation-control target of two per cent, as he contributed to the research that went into the decision to adopt the policy in 1991.

The early reviews of Macklem’s appointment suggest he will not shake up the central-bank’s policy too much, something he reinforced during his introductory press conference.

For example: the prospect of negative interest rates has been floated during the current crisis, but Macklem said he was comfortable with the effective 0.25 per cent floor that the Bank of Canada has settled on.

“There are some disruptive effects of going negative,” Macklem told reporters. “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 might want to be hesitant about introducing a new source of disruption.”
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