The Bank of Canada is likely to buy about $200-billion of government debt after announcing its first quantitative-easing program, which would nearly triple the amount of assets on the central bank’s balance sheet, bond strategists estimate.
Just a few weeks ago, Canada’s central bank was defying the global trend of monetary policy easing. But in a series of emergency interest rate cuts this month, it has slashed its key interest rate to 0.25 per cent, the level it regards as the floor.
Quantitative easing, or large-scale buying of assets, is now the policy measure favored by the BoC to ease the economic impact of the coronavirus pandemic.
The bank plans to buy at least $5-billion a week of Government of Canada securities, starting on April 1, with the purchases continuing “until the economic recovery is well under way.”
With economic growth off the table until the second half of the year, analysts see the purchases continuing through December. That would put total buying at nearly $200-billion, but likely more if purchases extend into 2021.
“Given that the announcement is open-ended, it could be closer to $250-billion when all is said an done,” said Andrew Kelvin, chief Canada strategist at TD Securities. “From an economic standpoint, it’s less costly to do too much than too little.”
Purchases of $200-billion would be about 10 per cent the size of Canada’s economy and would far eclipse the current level of assets the central bank holds. At $122-billion, its balance sheet is much smaller than those of its Group of Seven peers, who adopted quantitative easing in response to the 2008 financial crisis.
Canada’s economy could be hit particularly hard because household debt is at record levels and the price of oil, one of the country’s major exports, has collapsed to about US$20 a barrel.
With investors demanding a higher return to take credit risk, the BoC could decide to expand buying beyond government debt.
“If we see spreads on CMBs [Canada Mortgage Bonds] and provincial bonds continue to widen due to illiquidity and a difficult market environment, then there’s a good chance we could see the BoC step in there,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Nesbitt Burns Inc.
Other issues include the low starting point for yields and the high proportion of government bonds that mature within five years, said Ian Pollick, global head FICC strategy at CIBC World Markets Inc. Still, he expects asset purchases to help.
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