BoC bond-buying program faces misconceptions

A deputy governor of the Bank of Canada says its recent bond-buying program is not the equivalent of printing money or underwriting government debt at no cost, but rather a way to keep borrowing costs in check and support households and businesses in the wake of the Covid-19 pandemic.

“We are not financing government spending at no cost, nor are we making the government’s debt disappear,” said Paul Beaudry in a teleconference speech on Thursday to the Greater Moncton Chamber of Commerce, the Fredericton Chamber of Commerce, and the Saint John Region Chamber of Commerce.

“To put it simply: we are not providing a free lunch for the government through QE. The government will have to repay the bonds that we purchase.”

The central bank has purchased a little more than $180 billion in Government of Canada bonds since March as part of its quantitative easing, or QE, program. Over the same period, the federal government has rolled out a slew of spending programs to support businesses and consumers amid job losses tied to the Covid-19 pandemic.

The central bank’s extraordinary actions have put it into political crosshairs on Parliament Hill, where Conservatives have questioned its bond-buying program that effectively provides low-cost financing of federal debt.

During Tuesday’s meeting of the House of Commons finance committee, Finance Minister Chrystia Freeland defended the bank’s independence from the government under questioning from Conservative critic Pierre Poilievre.

Beaudry said the federal government’s recently announced measures should help keep incomes steady and support the economy’s recovery. He pushed back on the idea that the bank is financing the government’s debt, although he acknowledged that if the bank profits from buying bonds, it remits the profit to the government. He also said the central bankers are activating the printing press and adding cash to the economy, adding that “our balance sheets have to balance.”

“There is a big difference between financing the government and influencing the cost of government financing. Through QE, we are doing the latter _ we are lowering the cost of borrowing for the government,” he said.

“But much more importantly, we are lowering the cost of borrowing for everyone in Canada.”

On Wednesday, the central bank said it would continue to buy $4 billion bonds per week, down from $5 billion a week at the start of the Covid-19 pandemic, forecasting that the path of the economy could be on a choppy trajectory until a Covid-19 vaccine is widely available.

Economists said that Wednesday’s decision showed caution about recent Covid-19 cases and lockdowns, mixed with optimism about a potential vaccine.

“While the longer-term outlook has brightened, the near-term has become more challenging,” wrote Benjamin Reitzes, director of Canadian Rates and Macro Strategist at BMO Capital Markets Economic Research, in a note to clients about Wednesday’s rate decision.

Going forward, Beaudry says the Bank of Canada is prepared for the economy to either take a more persistent turn for the worse, or for an upside scenario where a Covid-19 vaccine rolls out quickly.

He said that the sharp economic rebound between the first and second waves of Covid-19 is likely to be followed by a longer, slower phase of the economic recovery.

“So that sets the scene,” he said. “Going forward, both downside risks, due to the rising cases of Covid-19, and upside risks to inflation, due to the vaccine, are in play.”

Beaudry said the Bank of Canada’s decision to buy the bonds is a way to keep long-term borrowing costs low, on top of its decision to dampen short-term borrowing costs by keeping its key interest rate at 0.25%.

“When we can no longer reduce our policy rate, we need to dig deeper into our tool kit if we want to further stimulate the economy,” he said.

“In theory, negative interest rates remain in the bank’s tool kit. But we’ve been clear that, barring a dramatically different set of circumstances, we don’t think negative rates would be productive in a Canadian context.”

In a note to clients on Wednesday, Dominion Lending Centres Chief Economist Sherry Cooper reacted to the Bank of Canada’s decision, noting previous projections that there could be market distortions if the central bank’s share of government bond holdings grows beyond 50%.

Relative to the size of the Canadian economy, the Bank of Canada is still holding fewer assets than its counterpart central banks at the U.S. Federal Reserve and Bank of Canada.

“Since we started QE, I’ve heard and read a lot about the risk of causing excessive inflation,” he said. “But rest assured, we will not overuse QE.”