By Michael O’Neill
The coronavirus is far from being tamed. The United States saw an 8.9% increase in new daily cases in the past week for a seven day average of over 171,000 per day.
Canada’s seven-day average pales in comparison; a mere 5,062 for the same period. Sure, the Canadian population is about 1/9th of that of the US, but even considering that difference, the US infection rate is about 5 times higher.
But there is a light at the end of the tunnel. Or more specifically, there are “eureka” moments in the laboratory. Pharmaceutical companies, AstraZeneca/University of Oxford, Pfizer/BioNtech, and Moderna recently announced vaccines that are around 90% effective.
The news was a shot in the arm for financial markets. It changed the narrative from: “how to cope in a COVID-19 world” to “how to position for a post-pandemic economic boom.” The boom will be even louder in the US with the Joe Biden Administration expected to enact a $1 trillion stimulus package.
Analysts are predicting a surge in global growth.
Goldman Sachs is forecasting 2021 US growth at 5.0%, and Euro-area growth at 5.3%. The International Monetary Fund projects Canada’s 2021 growth at 5.2%.
Those forecasts are supported by expectations that the major G-10 central banks maintain their ultra-dovish polices.
The Fed reaffirmed their dovish monetary policy stance on November 3. The statement said the Committee “will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”
The October 29, European Central Bank (ECB) monetary policy press conference statement echoed the Fed. President Christine Lagarde said “We will keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
The Bank of Canada was a tad clearer on interest rates.
At its October 28 monetary policy meeting, Governor Tiff Macklem said interest rates would not change until inflation gets to and stays at 2.0%, which the BoC forecasts suggested would not happen until 2023.
A reading of other G-10 central bank monetary statements suggests that “the fix is in.” The messages are the same. The monetary reset has begun, but is it just financial?
What happens if one government breaks ranks? Will the rest follow? New Zealand’s Finance Minister Grant Robertson is suggesting a change to the way the Reserve Bank of New Zealand formulates monetary policy.
He said, “One proposal I am seeking advice from the Reserve Bank is on whether to include stability in house prices as a factor for consideration in the remit when formulating monetary policy.”
In a typical political move, he said “I want to be clear I am not proposing any changes to the mandate or the independence of the Reserve Bank,” even though that is exactly want he his attempting. The RBNZ Governor Graham Orr, politely blew him off writing: “We will consider your suggestion of how the Monetary Policy Committee (MPC) could further take into account house prices when formulating monetary policy, and will respond with considered feedback in due course.”
But the horse is out of the barn.
How long do you think it will take before Canada’s government politicises the Bank of Canada?
Prime Minister Trudeau told a United Nations meeting at the end of September that the pandemic was an “opportunity for a reset.” He added “This is our chance to accelerate our pre-pandemic efforts to reimagine economic systems that actually address global challenges like extreme poverty, inequality and climate change.”
On November 17, BoC Governor Tiff Macklem sounded like he drank the Trudeau Kool-Aid.
“The BoC Kool-aid may not taste great” Photo: Open food facts
Governor Macklem admitted in a speech on November 17 that “climate change” does not appear in the Bank of Canada Act. But that won’t stop him from incorporating the governments “reset” into monetary policy.
In fact, he said he would do exactly that at a public policy forum, on November 17. He said, “The (Bank Act) instructs the Bank to promote the economic and financial welfare of Canada.” He went on to say, “Climate change and the transition to low-carbon growth will have profound impacts on virtually every sector of the economy in the decades ahead. So, to fulfill our monetary policy remit, we need to understand the implications of climate change for economic growth and inflation.”
Governor Macklem’s embracement of the government’s climate change agenda appears to conflict with its independent status.
That suggests a major side-effect of the coronavirus vaccine is a Bank of Canada independence reset.