Bank of Canada | Reduction in weekly federal bond purchases

Despite the extraordinary impact on debt yields, the briefing note last year seems to have ignored the bond buying program.

The central bank has done everything to keep interest rates at their historic lows since the onset of the epidemic, such as keeping its key interest rate close to zero and buying federal bonds at an unprecedented rate in the world. Quantitative easing (smaller for QE) is the first part of the world to enter.

In addition to the new decision on the key rate, Bank of Canada will announce a reduction in its weekly federal bond purchases on Wednesday morning.

If the central bank withdraws from purchases, demand for federal bonds will fall and rates will rise, which will affect the federal government’s multi-billion dollar debt repayment costs.

According to Rebecca Young, Director of Fiscal and Provincial Economics, Scotiabank, due to the debt link, the central bank needs to clearly explain any changes in its bond purchases so that markets do not worry about decisions being made to help federal finance.

“Markets should also assume that the central bank is independent because inflation forecasts are anchored,” Mr said.^{To me} Young.

“If there is any doubt that the Bank of Canada will carry out its QE program to keep government financing rates low, it will intimidate markets that say to themselves: ‘Well, they are motivated by a desire to keep low public debt. Charges”, analyzes the Scotiabank expert.

Federal debt has risen sharply since the beginning of the epidemic, with billions of dollars being pumped into the treasury economy to provide lost income to workers as well as to subsidize businesses and help businesses. Salaries and their fixed costs.

As debt touches $ 1.2 trillion by the end of the fiscal year, the Liberals are looking to finance that debt with long-term bonds to take advantage of their historically low interest rates.

In a December 22 informative note, a senior Finance Ministry official recalled that the debt management should take into account the “risks associated with external changes” to the quantitative easing program, but also linked to a key rate for any change.

The key interest rate has been stable at 0.25% since the outbreak began a year ago, and Central Bank Governor Tiff McClellan said he had never seen it rise again before next year.

With the low rate remaining, the government “can continue its progressive policy by securing its debt by issuing long-term bonds,” it said on the page of the exhibition along with the December 22 note.

This document, obtained by the Canadian Press under the Information Access Act, also warns of the importance of being prepared to respond to any unexpected shock.

These tremors can come from a variety of sources, forcing the arrival of a new wave or new variant of coronavirus infection cases in the fall, to hold back or to restart faster than expected.

According to Elliott Hughes, a former adviser to former finance minister Bill Mornieu and now a senior adviser to Zumma Strategies, all of these variables could force the Bank of Canada to revise its schedule to raise the key rate.

“I suspect the bank would not be willing to take a tough step before focusing better on what is happening in the world,” Mr Hughes said.

Although the first half growth was slightly weaker than expected, the bank’s top executives expect the economy to recover strongly from this summer.

In a note released on Friday, CIBC chief economist Avery Shenfeld argued that the Bank of Canada was unlikely to reject its promise to keep key rates unchanged until the second half of 2022.