The Bank of Canada said it’s ending a handful of emergency programs launched last year to stabilize markets, while offering new details on how it plans to slow its pace of federal bond buying as the economy improves.
In a speech on Tuesday, deputy bank governor Toni Gravelle said the central bank will let its commercial paper, provincial bond and corporate bond buying programs expire in the coming months, now that debt markets are functioning normally. It will also end two sales and repurchase agreement – or “repo” – programs launched last March to pump cash into financial institutions that faced a liquidity crunch early in the pandemic.
The speech contained no 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.
Mr. Gravelle, however, did say that the bank’s governing council is “evaluating” ways to adjust the pace of bond buying, and described plans to get to a “reinvestment phase” of QE, where the bank is no longer buying new federal government bonds, but is still reinvesting proceeds from maturing assets.
“There should not be too much impact from the cessation of select market functioning facilities directly,” Ian Pollick, global head of fixed income, currency and commodities strategy at CIBC Capital Markets, wrote in a note.
“The bigger news today is the strongest signal yet that the Bank is ready to conduct a taper, and begin ‘right sizing’ the QE program,” he said.
Mr. Pollick and other analysts said Mr. Gravelle’s comments reinforced the idea that the bank will begin “tapering” its federal government bond buying in April, likely from $4-billion to $3-billion a week.
The bank launched its suite of emergency measures last March and April, as lockdowns and economic uncertainty fuelled a dash-for-cash from investors and businesses 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. The repo programs were aimed at providing liquidity to banks, by allowing them to swap assets like bonds or mortgage-backed securities for cash for a set period of time.
Mr. Gravelle said the repo measures are being wound down as there is now “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,” he said.
As for the asset purchase programs: “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 prepandemic levels. So it’s clear that these extraordinary facilities are no longer required,” he said.
Both the provincial and corporate bond buying programs ended up being smaller than anticipated. The bank bought around $17-billion worth of provincial bonds (the limit was $50-billion), and around $250-million worth of corporate bonds (the limit was $10-billion). By the time the corporate bond purchase program launched in mid-April, corporate debt markets were already working well as investors returned to the market.
The combination of programs – including the QE program – 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. Mr. Gravelle said the bank will continue holding the provincial and corporate bonds to maturity. But its balance sheet will start to shrink in the coming months as around $120-billion worth of term repos “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.
While most of the bank’s asset purchase programs have either ended or are ending shortly, the Government of Canada bond-buying program continues 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 federal 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.
QE has added around $350-billion worth of GoC bonds to the bank’s balance sheet over the past year. It now owns more than 35 per cent of the Government of Canada bond market, which Mr. Gravelle said was notably higher than other central banks that are conducting QE.
He said that any slowdown in the pace of QE will be gradual, noting that “we would be easing our foot off the accelerator, not hitting the brakes.” But he also reiterated the bank’s guidance from 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.” And he noted that the bank will publish a new economic outlook in April.
“That’s about as blunt as the BoC tends to be when it comes to providing advance guidance, short of whacking markets with a hammer,” wrote Derek Holt, head of capital markets economics at Scotiabank.
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