The Bank of Canada is conducting a comprehensive review of its pandemic-era policies, during which it purchased hundreds of billions in government bonds to lower interest rates. This review could be Governor Tiff Macklem’s last opportunity to defend these actions before a major political change potentially places one of his strongest critics in power.
Early next year, the central bank plans to release a report detailing the “exceptional” measures taken during the COVID-19 pandemic. This report is expected just before Canada’s next federal election, scheduled by October 2025.
Pierre Poilievre, the Conservative Party Leader, currently leads Prime Minister Justin Trudeau in the polls and has been a vocal critic of the Bank of Canada’s first venture into quantitative easing (QE), claiming it contributed to inflation. During his campaign for the party leadership in 2022, Poilievre even suggested he would dismiss Macklem if elected. If Poilievre wins the election, he would assume office ahead of the bank’s scheduled review of its mandate in 2026 and the end of Macklem’s term in 2027. A Conservative government would likely scrutinize QE and other tools closely. However, the central bank will first conduct its own review, including an external assessment by central banking experts, to evaluate the impact of bond-buying and other measures on inflation, which peaked at 8.1% in June 2022.
In a June 13 speech, Deputy Governor Sharon Kozicki cited research showing that QE added up to 3% to Canada’s GDP at its peak. However, this also contributed 1.8 percentage points to inflation, a significant side effect not widely discussed.
The central bank maintains that supply chain disruptions and higher commodity prices were the main inflation drivers. Kozicki stated that policymakers see “very little correlation” between the increased money supply and the inflation surge.
Initially, QE was used to restore market functionality during the pandemic’s economic shock. It complemented then-Governor Stephen Poloz’s decision to cut interest rates from 1.75% to 0.25%, injecting liquidity into financial markets and keeping long-term borrowing costs low.
Despite significant asset purchases continuing well into the recovery, the central bank bought a total of C$340 billion ($248 billion) in bonds, and at its peak in 2021, held up to 43% of Canadian government bonds on its balance sheet. This enabled Trudeau’s government to issue record amounts of debt at lower costs, funding wage subsidies and other programs to sustain the economy in 2020.
Jeremy Kronick, associate vice president of the C.D. Howe Institute, remarked, “How much of that fiscal was aided by the bank being ready to buy those bonds during QE? That is a legitimate question.” Although the Bank of Canada wasn’t buying most bonds directly from government auctions, its secondary market purchases likely instilled confidence in other market players to buy government bonds at higher prices.
In 2020, when Poilievre was the Conservative finance critic, he accused the Bank of Canada of acting like an “ATM for Trudeau’s insatiable spending appetites.” During his successful 2022 leadership bid, he pledged to fire Macklem — a promise criticized by many economists and not recently reiterated.
Yaroslav Baran, a former communications strategist for Prime Minister Stephen Harper’s Conservative government, suggests that the Bank of Canada’s review might “calm down” its relationship with the Conservatives. Acknowledging that QE contributed to inflationary pressures would be “well-received,” he said.
With inflation trending towards the central bank’s 2% target, it may become easier next year for the Bank of Canada to argue that its emergency measures were ultimately effective.
Bank of Canada spokesman Paul Badertscher indicated that officials will reveal more details soon, including a list of central banking and academic experts who will review the findings.
In response to the upcoming review, Poilievre’s media relations team referenced a documentary titled “Housing Hell,” in which Poilievre reiterates his stance that government spending, QE, and money supply expansion significantly contributed to housing inflation.
Veronica Clark, an economist at Citigroup, remarked, “There’s really not a good way to directly pinpoint what the effect of QE on inflation would be, in isolation. While it was probably both loose fiscal and monetary, a lot of the inflation is easier to pinpoint directly more to the fiscal side of things.”
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