Documents detail BoC’s bond buying on federal debt

OTTAWA – Federal officials’ apparent unconcern about the impact of central bank actions on government debt management shown in internal documents is about to be tested as the Bank of Canada stands ready to slow the pace of its bond purchase program

OTTAWA – Federal officials’ apparent unconcern about the impact of central bank actions on government debt management shown in internal documents is about to be tested as the Bank of Canada stands ready to slow the pace of its bond purchase program.

The briefing note from late last year seems to gloss over the bond purchase program despite the extraordinary impact on bond yields.

The central bank has been pushing interest rates at all-time lows since the pandemic began by keeping its key rate near zero and buying Bunds at an unprecedented pace as part of its first foray into the world of quantitative easing, or QE for short.

The Bank of Canada is widely expected to reduce its weekly Bund purchases as part of a scheduled interest rate announcement on Wednesday morning.

If it backs away from the purchases, demand for bunds would fall and interest rates would rise, which could impact the cost of the federal government to refinance billions of dollars in debt.

Rebekah Young, director of fiscal and provincial economics at Scotiabank, says the link to debt means the central bank must clearly explain any changes in bond purchases so markets don’t worry about decisions being made about them To support federal finances.

“Markets also need to feel like the central bank is independent because that’s how inflation expectations are anchored,” Young said.

“If there is a concern that the Bank of Canada is maintaining its QE program to keep government funding costs down, it would really scare the markets into thinking, ‘OK, they are now driven by this sovereign debt hold”. Fees down. “

National debt has skyrocketed over the course of the pandemic as the treasury spent billions to replace lost income for workers and subsidies to businesses to cover wages, utilities and rents.

With debt expected to top $ 1.2 trillion this fiscal year, Liberals have tried to tie up new debt in long-term bonds to take advantage of historically low interest rates.

A December 22 briefing note to the Treasury Department’s top officials indicated that debt management should take into account “the risks associated with exogenous changes” in the quantitative easing program, as well as changes in policy rates.

The central bank’s key rate has been 0.25 percent since the pandemic started a year ago, and Governor Tiff Macklem said the bank doesn’t expect the benchmark rate to hike until next year.

The longer the interest rate stays low, the longer the federal government can “maintain its progressive approach to adding more debt to long-term issues,” said a slide in a presentation accompanying the December 22nd briefing note.

The document that The Canadian Press received under the Access to Information Act also warned of the need to respond to “unexpected shocks”.

The shocks could be anything from spikes in cases in the fall or the proliferation of new variants that might require re-locks, to improving faster than expected.

Elliot Hughes, a former financial advisor to Bill Morneau and now at Summa Strategies, said either could lead the bank to rethink the schedule for a rate hike.

“I suspect the bank won’t take drastic steps until they have a really good grasp of what the world is like,” said Hughes.

The bank’s senior decision-makers expect the economy to recover strongly from this summer onwards, even if growth in the first half of the year falls short of the bank’s forecasts.

In a statement on Friday, CIBC chief economist Avery Shenfeld said the Bank of Canada is unlikely to change its promise to hold rates until the second half of 2022.

“Not to say the Bank (of Canada) is watching elections, but the government will also be happy if its central bank avoids annoying Canadians about earlier rate hikes when there are elections in September,” Shenfeld wrote.

This report by The Canadian Press was first published on July 13, 2021.

Jordan Press, the Canadian press

Comments are closed.