ADVERTISEMENT

Canada Expands Asset Buying to Buffer Sharpest-Ever Downturn

Bank of Canada Expands Purchases to Provincials, Corporates

(Bloomberg) -- The Bank of Canada is broadening the range of assets it will purchase in a bid to support an economy that could be heading for a deeper recession than previously expected.

Asset purchases will now include as much as C$50 billion ($35 billion) in provincial bonds and C$10 billion in high-grade corporate bonds, two markets where conditions remain strained, the central bank said Wednesday in a statement. It will also boost purchases of short-term federal government debt, and extend its holdings of money market paper.

“These measures will work in combination to ease pressure on Canadian borrowers,” policy makers led by Governor Stephen Poloz said in a statement, in which the bank kept its key interest rate unchanged at 0.25%. “As containment restrictions are eased and economic activity resumes, fiscal and monetary policy actions will help underpin confidence and stimulate spending by consumers and businesses to restore growth.”

Canada Expands Asset Buying to Buffer Sharpest-Ever Downturn

Canada’s currency depreciated on the report, falling 1.7% to C$1.4128 against its U.S. counterpart at 12:26 p.m. Toronto time. Two-year government bond yields dropped 4 basis points to 0.34%.

The central bank has already responded aggressively to blunt the effect of the pandemic on the Canadian economy, slashing interest rates to near zero and launching a range of emergency asset purchases totaling C$200 billion. In part, the cash injections will help the market sop up the massive amount of debt federal and provincial governments are expected to issue in coming months to finance their stimulus packages.

What Bloomberg’s Economists Say

“Market functionality is the BoC’s main focus, and to that end it has largely been successful since rate cuts began in early March. However, the statement also included the line that ‘the next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households.’”

-Andrew Husby, Bloomberg Economics

Click here for full report

The bank embarked on its first ever large scale asset purchase program last month, by committing to buy at least C$5 billion in federal government bonds each week. Wednesday’s announcement expands that program, and Poloz indicated that the bank is willing to take further action if needed.

“The bank stands ready to augment the scale of any of its programs should market conditions warrant it,” he said in opening remarks at a press conference in Ottawa.

Poloz also drew a line between what he’s doing and so-called quantitative easing. The Bank of Canada is simply seeking to restore proper functioning in credit markets, instead of trying to get longer-term interest rates lower. He said there’s little point in starting QE when the economy is in lockdown.

“With the 10-year yield sitting at 0.75% and the economy at the moment basically turned off, there’s very little purpose in conducting operations aimed at trying to lower longer term interest rates,” the governor said.

Canada Expands Asset Buying to Buffer Sharpest-Ever Downturn

In a separate Monetary Policy Report on Wednesday, the bank acknowledged the economy is headed to its sharpest contraction on record. While refraining from producing official economic forecasts due to the uncertainty, officials released two stylized scenarios that show the economy could shrink between 15% and 30% in the second quarter, compared to the end of 2019.

“There may not be a traditional forecast here, but the bank’s messaging is clearly ‘buckle your seatbelts’,” Brian DePratto, senior economist at Toronto-Dominion Bank, wrote in a note. “Even in its optimistic scenario, the Bank of Canada foresees an unprecedented economic shock.”

A separate preliminary release from Statistics Canada on Wednesday showed the economy likely suffered its largest contraction on record in the first quarter. Statistics Canada’s inaugural “NowCast” said first quarter output fell 2.6% from the prior quarter, which on an annualized basis would translate to about 10%, or the most on record dating back to 1961.

While the Bank of Canada has not gone as far as the Federal Reserve over the past month, it’s still in uncharted territory. It was the sole Group of Seven central bank not to use widespread asset purchases through the 2008 global recession, and only joined the quantitative easing club at the end of last month.

The expanded bond buying programs announced Wednesday will be put in place in the coming weeks, the central bank said. In addition to buying provincial and corporate debt, the bank said it will also enhance its term repo facility to permit funding for up to 24 months, and temporarily increasing the amount of Treasury Bills it acquires at auctions to as much as 40%, effective immediately.

©2020 Bloomberg L.P.