Bank of Canada deputy governor Paul Beaudry used a key speech Thursday to defend the central bank’s quantitative easing program, seeking to dispel the notion that it is printing money to finance the federal government’s huge deficit.
In an address via video conference to the Moncton, Fredericton and Saint John chambers of commerce, Mr. Beaudry stressed that the QE program is designed to lower long-term interest rates to stimulate the economy – not to fund government spending. The central bank has purchased more than $180-billion of Government of Canada debt under the program since April.
“To put it simply: We are not providing a free lunch for the government. The government will have to repay the bonds that we purchase through our QE program when they reach maturity,” Mr. Beaudry said.
“QE does not release the government from its liabilities,” he said. “The sole purpose of QE is to reduce the cost of borrowing for everyone in Canada, so we can help people get back to work and achieve our inflation target.”
The speech follows up on Wednesday’s interest rate decision, in which the bank held its key policy rate steady at a record-low 0.25 per cent. It also reaffirmed its commitment to the QE program, under which it buys at least $4-billion a week of federal government bonds in the open market.
But while the bank stood pat on policy and broadly repeated the economic outlook that it published in late October, Mr. Beaudry pointed out that much has changed beneath the surface of the outlook. The competing forces of the second wave of the pandemic on the one hand, and the arrival of vaccines on the other, are tugging at the outlook in opposite directions – and that’s forcing the central bank into some hard reassessing of its economic projections, he said.
“We have to really work hard to try to put all those elements together, to try to figure out, when you have good and bad, where does it end up – does it change your assessment?” Mr. Beaudry said in a media conference after his speech. “Right now, we really haven’t done all of that work to be able to do that.”
The key negative risk, he said, is that second-wave shutdowns force businesses that have been struggling throughout the pandemic to permanently close their doors. He said this could lead to increased “scarring” on the economy that would make the recovery more difficult.
“On the flip side, the vaccine is clearly more positive news, relative to [the October outlook],” Mr. Beaudry said.
In the speech, Mr. Beaudry said the bank still has a few policy tools available to it should the economy take a “persistent turn for the worse” – including, he said, the possibility of trimming its key rate below 0.25 per cent. That’s something the bank hasn’t considered until recently; it has consistently referred to 0.25 per cent as the effective bottom. He added the bank still doesn’t see taking rates into negative territory as a viable option.
“We’re trying just to reassess,” he said. “Maybe it is still the right level. … The last thing we’d like to do is something that would disturb market functioning.”
Mr. Beaudry’s speech was billed as the bank’s economic progress report – an update the bank routinely provides as a follow-up to interest-rate decisions that land between its quarterly Monetary Policy Reports. Yet the speech was dominated by a detailed explanation of how the QE program works. It’s evidence the Bank of Canada is concerned about perceptions of the program, amid criticism by the federal Conservative opposition that the bank is enabling profligate government spending – and dangerously expanding its balance sheet in the process.
The bank’s asset purchases since the pandemic began have increased its balance sheet to more than $530-billion from about $120-billion. A little more than half of that consists of federal government bonds – accounting for roughly a third of the entire supply of government long-term debt.
“There is a big difference between financing the government and influencing the cost of government financing. Through QE, the Bank of Canada is doing the latter – we are lowering the cost of borrowing for the government. But most importantly, we are lowering the cost of borrowing for everyone in the economy.”
He also played down concerns that the increase of money supply will fuel runaway inflation.
“It is true that QE is designed to increase our current low level of inflation. That’s the whole point – to get us back near our 2-per-cent target,” Mr. Beaudry said. “But rest assured, we will not overuse QE and overshoot our 1- to 3-per-cent target range for inflation. The exit strategy for our QE program is tied to our inflation goals.
“We will pursue quantitative easing until our economic recovery is well under way,” he added, reiterating the central bank’s forward guidance on its QE program.
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