Bank of Canada to end provincial, corporate bond buying programs

Bank of Canada to end provincial, corporate bond buying programs

The Bank of Canada is ending a number of emergency programs it launched last year to stabilize markets and pump cash into the banking system.

In a speech on Tuesday, deputy bank governor Toni Gravelle said the central bank will wind down its commercial paper, provincial bond and corporate bond buying programs in April and May. The bank is also ending two of its repo programs – its term repo operations and contingent term repo facility – over the next two months.

Mr. Gravelle did not give a timeline for slowing or ending the bank’s $4-billion a week Government of Canada bond buying program, also known as quantitative easing, or QE. He did, however, say that the bank’s governing council is “evaluating” ways to adjust the pace of bond buying, while noting that “we would be easing our foot off the accelerator, not hitting the brakes.”

The bank launched its suite of emergency measures last March and April, as lock-downs and economic uncertainty fuelled a dash-for-cash and financial markets began to seize up. The asset purchase programs were designed to calm markets by ensuring there would be at least one major buyer for assets, while the repo programs were aimed at providing liquidity to banks, allowing them to swap assets like bonds or mortgage backed securities for cash for a set period of time.

“We can take these steps because now there is ample system-wide liquidity for financial institutions to draw from. This is both in terms of their own unusually high levels of deposits, as Canadians save more during the pandemic, and the large amount of cash – more specifically, settlement balances – that we have added to the financial system,” Mr. Gravelle said

“Corporate and provincial borrowers have unfettered access to fully functional debt markets. And credit spreads for most of these borrowers are either at or below pre-pandemic levels. So it’s clear that these extraordinary facilities are no longer required,” he added.

The combination of programs has dramatically expanded the size of the bank’s balance sheet over the past year, to around $575-billion from around $120-billion before the pandemic. The balance sheet is expected to start shrinking as around $120-billion worth of term repos is set to “roll off” between mid-March and the end of April.

“The Bank’s balance sheet – after being relatively stable since July – will decline to about $475-billion, about $100-billion smaller than its current level,” Mr. Gravelle said.

“In terms of the longer-term asset holdings, the program to buy corporate bonds currently sits at about $200-million in assets, while the program to buy provincial bonds sits at just over $17-billion. At this point, the Bank doesn’t intend to sell any of the assets purchased through either of these programs, he added.

While most of the bank’s asset purchase programs will end, the Government of Canada bond buying program will continue apace – at least for now. This is because the goal of the program shifted last year from calming markets to providing economic stimulus by keeping interest rates down.

QE works by bidding up the price of government bonds on the secondary market and lowering their yields. (Bond prices and yields move in opposite directions). Debt across the economy is priced relative to “risk-free” government debt, so holding down GoC bond yields lowers the interest rates on other types of debt including mortgages, car loans and corporate bonds.

Mr. Gravelle reiterated what the bank said in January: “If the economy plays out in line with or stronger than our economic projection, we won’t need as much QE stimulus over time.” Many analysts expect it to begin adjusting its pace of bond buying at the next rate decision on April 21.

“When we start gradually dialling back the amount of incremental QE stimulus that we are adding, we will eventually get down to a pace of QE purchases that maintains – but no longer increases – the amount of stimulus being provided. That is, a pace where our GoC bond holdings are largely stable and we reinvest the proceeds of maturing assets,” he said.

Notably, he added that discussions around the pace of QE are separate from decisions around raising the bank’s key policy rate.

“A decision on the policy rate is linked to the economic outcomes described in our forward guidance – which says that we will leave the policy rate at 0.25 per cent until economic slack is absorbed so that the 2 per cent inflation target is sustainably achieved. In the forecast that we published in January, we projected this wouldn’t happen until into 2023. So, we would arrive at the reinvestment phase of QE some amount of time before we start to increase the policy interest rate,” he said.

Published at Tue, 23 Mar 2021 17:28:04 +0000