Macklem will need to recommit to large\u002Dscale asset purchases in order to keep up with an unexpectedly large jump in government spending
Since early April, the central bank has added almost $7 billion in federal bonds a week to its balance sheet to sop up the supply, becoming the government’s main financier through the creation of new money. The process, known as quantitative easing, allows policy makers to keep borrowing costs low, an essential ingredient for any recovery.
The crisis has taken the Bank of Canada into uncharted waters, forcing it to cut the benchmark rate to near zero, injecting hundreds of billions in cash into financial markets and undertaking the first-ever foray into large-scale asset purchases. The current policy is to buy at least $5 billion in government bonds until the recovery is “well underway,” effectively a signal it plans to keep borrowing costs as low as possible for as long as possible.
“It may be prepared to work the guided range of purchases well above the minimum of the at least $5 billion per week amount it is implementing,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, said in a report to investors. “It may be helpful to further define program duration beyond the vague until-the-recovery-is-well-underway guidance in such fashion as to inform the stock and period of such purchases.
Markets are expecting the bank to keep its benchmark interest rate unchanged at 0.25 per cent for at least two more years, at a level the bank considers its effective lower bound. Both Macklem and his predecessor, Stephen Poloz, have indicated that making rates negative would be one of the least desirable options.
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