Bank of Canada working hard to avert tantrum that will eventually slow government bond purchases

0
17
Bank of Canada working hard to avert tantrum that will eventually slow government bond purchases


Kevin Carmichael: Deputy Governor says change will be gradual, soothing traders who might panic if it happened too abruptly

Content of the article

The Bank of Canada works hard to avoid a tantrum when it finally decides to slow down its government bond purchases.

Deputy governor Toni Gravelle used a speech on March 23 to further condition traders on the eventual end of quantitative easing (QE), an advanced stimulus technique whereby the central bank uses its power to create money. money to buy securities.

Gravelle stressed that the change – when it does happen – will be gradual, soothing traders who might panic if the Bank of Canada withdraws too abruptly from its status as a major buyer of public debt. Some Bay Street analysts, including Bank of Montreal economist Benjamin Reitzes, believe the central bank could begin the process of reducing its bond purchases as early as April, as the recovery looks stronger than expected.

“I want to be clear here: moderating the pace of buying while adding to our holdings would just mean that we are still adding stimulus through QE, but at a slower pace,” Gravelle said. “It wouldn’t mean that we remove the stimulus. We would take our foot off the accelerator, not by pressing the brakes. ”

Publicity

This ad is not yet loaded, but your article continues below.

Content of the article

Central bankers are haunted by what the US Federal Reserve went through in 2013, when then-President Ben Bernanke revealed it was on the verge of cutting back on its monthly treasury bill purchases.

QE was still an untested strategy at the time. The Fed thought it was clear on its intentions, but the volatility that followed showed policymakers weren’t clear enough. Yields soared and the stock market plunged 4% in a matter of days. The lesson: communication matters.

The Bank of Canada currently has a portfolio of financial assets worth approximately $ 575 billion, up from $ 120 billion before the pandemic. More than half of these holdings are Government of Canada bonds, which set the price of most private debt. The central bank re-pledged to buy at least $ 4 billion in government debt every week at the end of its final policy deliberations earlier this month.

Officially, the Bank of Canada has said it will keep its benchmark interest rate near zero until inflation returns to 2% from its current level of around 1%. He also reiterated in March that he would buy bonds until the recovery is “well underway”, although policymakers have said they may end up adjusting the amount.

Current economic forecasts from the Bank of Canada suggest that the economy will not fully recover from the effects of COVID-19 lockdowns until 2023, so there is little reason to worry about a tightening of monetary policy by so early.

Publicity

This ad is not yet loaded, but your article continues below.

Content of the article

Yet it would be a mistake to assume that central bankers like to be active players in debt markets. They will look for exits as soon as it feels safe.

For example, the Bank of Canada announced on March 23 that it would end emergency purchase programs this spring related to commercial paper, provincial bonds and corporate bonds. Traders now buy and sell freely with each other, so the central bank just pulls out.

Gravelle also noted that the Bank of Canada has bought about 35 percent of all Government of Canada debt since the start of the pandemic, far more than its peers in the United States, Britain, the Union. European Union and Sweden. BMO’s Reitzes advised clients in a memo to treat Gravelle’s comment on the Bank of Canada’s inordinate amounts outstanding in federal debt as an unofficial cap and, therefore, it would soon be the bank’s own to “explode further.” .

Either way, there is no doubt that the Bank of Canada is setting itself up to reduce its bond purchases, assuming the recovery stays on track.

Publicity

This ad is not yet loaded, but your article continues below.

Content of the article

When the time comes, Gravelle said the initial goal would be to stop increasing the Bank of Canada’s public debt, slowing the pace of purchases to a pace that “maintains” the current level of stimulus, rather than try to exercise more on the downside. pressure on interest rates. This will be done by reinvesting the proceeds from maturing assets, rather than creating even more money to buy bonds.

Gravelle also pointed out that the Bank of Canada can ease QE while leaving the benchmark interest rate at 0.25 percent.

“These decisions are separate,” he said, a final hint that borrowing costs will still be low for a long time to come, no matter when the phase-down begins.

Financial post

• Email: [email protected] | Twitter:

An in-depth report on The Logic’s innovation economy, presented in partnership with the Financial Post.



LEAVE A REPLY

Please enter your comment!
Please enter your name here