BMO: The Bank Of Canada Has No Justification To Continue Extreme Stimulus

Posted by Daniel Foch,

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It’s time to take off the training wheels for Canada’s economy, which is now looking overstimulated. That’s the take from BMO‘s Douglas Porter, who sees stimulus coming to an end as early as this week. The Bank of Canada (BoC) is increasingly looking out of touch with reality. BMO, amongst others, now sees no justification for the level of stimulus the central bank is using.

The Bank Of Canada Is Out Of Step With Housing And The Economy

The Canadian economy hasn’t recovered to its pre-pandemic glory, but it’s not far off either. While it needs help to grow, it doesn’t need this much help from the central bank. Canada’s outlook doesn’t look nearly as bad as it did at the beginning of the pandemic. However, little has changed in terms of the stimulus it’s receiving.

Programs like quantitative easing (QE) are still used to suppress borrowing rates. The overnight rate is already next to zero (0.25%), but the central bank is driving borrowing costs even lower. By driving down rates, they’re hoping to stimulate even more demand for goods. If demand for goods runs too high, the stimulus becomes inflationary. No one wins when inflation is elevated, since it consumes extra income, but not more goods.

It’s tough to argue for more stimulus with record home and stock prices, and high inflation. Promoting more stimulus would be arguing for higher inflation at this point.

“… [the BoC’s] current ultra-stimulative policies look far out of step with red-hot housing, record equity markets, decades-high inflation, and employment back at pre-pandemic levels,” said Porter.