Canada Quantitative Easing to Be ‘Gentler’ Than U.S., CIBC Says

A further explanation of what may lie ahead for the Bank of Canada in terms of its new “quantitative easing” policy, as well as a subtle rate prediction at the end of the article.

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April 6 (Bloomberg) -- Canada will adopt a “gentler” form of quantitative easing than the U.S. has because of its explicit inflation targeting policies and healthier banks, said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.

Bank of Canada Governor Mark Carney will adopt so-called quantitative or credit easing within six months of announcing guidelines on April 23, Shenfeld said in a telephone interview from Toronto today. The central bank may purchase corporate debt -- such as short-term commercial paper -- and government bonds that mature in three to seven years, he said.

The Bank of Canada has almost run out of room for using interest-rate cuts to stimulate an economy in recession, after it lowered its key borrowing rate to 0.5 percent on March 3.

Policy makers may be able to boost the economy by purchasing securities to revive debt markets, without using the transactions to inject newly created money into the economy. “It might not be true quantitative easing,” Shenfeld said.

Under quantitative easing, asset purchases can be paid for with new money created by the central bank. The extra cash is supposed to encourage banks to expand lending to consumers and businesses.

The U.S. Federal Reserve’s extraordinary policies are reflected in its balance sheet, which has more than doubled over the past year. The Fed has taken on assets including mortgage securities, corporate debt and now long-term Treasuries under its latest policy decision last month.

“In Canada, the banking system isn’t as broken and therefore a lighter hand will be required,” Shenfeld said.

The Bank of Canada’s 2 percent inflation target will also limit how far the central bank is willing to go to boost demand, Shenfeld said.

‘All-out War’

“Only in the unlikely event that Canadian core inflation goes negative on a sustained basis would we expect the Bank to launch an all-out war on deflation that also pumped up money growth,” he said.

The core inflation rate, the consumer price index excluding eight volatile products, will slow to a 0.8 percent annual pace in the fourth quarter, he predicts.

Governor Carney said at an April 1 speech that publishing guidelines doesn’t mean using extraordinary policies is “preordained,” and any new steps will be consistent with the inflation target.

The Bank of Canada will probably keep its benchmark lending rate unchanged at 0.5 percent through the first quarter of next year, opting first to scale back its quantitative or credit easing policies when the economy picks up again, Shenfeld also said. Gross domestic product will contract until the fourth quarter when it will expand at a 2.5 percent pace, he said.

By Greg Quinn