By Michael O’Neill
Canada has two official languages and umpteen non-official languages, reflecting its vast, multicultural population. Bank of Canada communications appears to ignore all of them. They may be written in English and French, but in reality, it is a central bank specific dialect that obfuscates the message.
The term Quantitative Easing is a prime example of central bank-speak. The term entered the central bank lexicon twenty-six years ago, when Richard Werner, a German economist, used it to describe Bank of Japan actions in 1995. Former Fed Governor Ben Bernanke embraced the concept with unbridled enthusiasm in response to the 2008 Financial Crisis, spending over $3.6 trillion to buy a variety of financial assets, the majority of which were Federal government bonds. That is chump-change to Fed Chair Jerome Powell. He added over $3.8 trillion to Bernanke’s totals to offset the negative impact of COVID-19 restrictions and lockdowns on the economy.
Source: Federal Reserve
It’s a neat trick worthy of Penn and Teller. The Fed doesn’t borrow money to pay for the assets. Instead, it just cranks up the printing presses and runs off all the Benjamin’s it needs. Central bankers translate the process as expanding the balance sheet by issuing “settlement balances,” a “privilege” only available to them.
The Bank of Canada didn’t join the QE party until April 1, 2020. That’s when they dipped a tentative toe into the QE morass, buying just $1.0 billion of Canadian government bonds. They liked it. By the end of January 2021, the QE program had ballooned the BoC balance sheet from a pre-pandemic $120 billion level to $575.0 billion.
It is a rounding error compared to the USA and other G-7 countries except for Japan.
Source: BoC Speech, Dec 10,2020
Quantitative Easing (QE) is an unconventional monetary policy tool that enables central banks to stimulate the economy by increasing money supply and inflation.
In a speech on December 10, 2020, BoC Deputy Governor Paul Beaudry took pains to explain that QE does not increase monetary supply. That’s because they pay for the bonds by issuing a variable interest rate liability in the form of “settlement balances.” He said, “when we carry out QE, our balance sheet expands, but the number of banknotes in circulation does not.
It looks like money, it acts like money, but it’s not money-what gives?
The March 10 monetary policy statement promised: “the Bank will continue its QE program until the recovery is well underway.” It also said, “as we continue to gain confidence in the strength of the recovery, we will gradually adjust the pace of our QE purchases.” Now that is a straightforward statement of action.
It’s barely two weeks later, and the BoC is Confidence Meter has moved to the Tweak Zone
Source: Wikicommons/IFXA Ltd
At least, that’s what Deputy Governor Toni Gravelle is telling markets. In a speech on March 23, he outlined the steps the BoC would undertake to taper (reducing) QE purchases. They have already started.
The BoC announced the discontinuation of market functioning programs introduced during COVID-19. Simply put, they will stop buying Provincial and Corporate bonds as of April 2. The Bank also announced the suspension of its Term Repo operations and Contingent Term Repo facility as of May 10. These two programs are other tools used by the Bank to manage its balance sheet.
Mr Gravelle insists that even as they moderate QE purchases, they are still providing stimulus. He added that “eventually, the size of purchases will dwindle to a level” that maintains—but no longer increases—the amount of stimulus being provided.
He also claimed that “once stresses have dissipated, QE purchases also help lower borrowing costs for households, businesses and governments by putting downward pressure on bond yields and lending rates throughout the financial system.
He goes on to say that just because they are adjusting QE purchases, “it doesn’t mean we have changed our views on when they will need to start raising rates.”
Fans of Sesame Street know, “One of these things is not like the others, One of these things just doesn’t belong.”
If adding QE lowers interest rates, reducing QE should translate into higher rates.
Ask anyone who remembers the 2013 US “Temper Tantrum?” Back then, the Fed announced they would “taper” QE purchases, and Treasury yields soared.
Why will it be any different in Canada?
The BoC may not want to raise rates, but Bond traders could force their hand. The traders are already nervous about the inflationary impact on prices as restaurants and services reopen.
In summary, the Bank of Canada plans to begin tapering QE purchases, which could happen as soon as the April monetary policy meeting.
The BoC says reducing QE will not raise interest rates even though they also say having QE helps lower interest rates because of “how the trajectories for economic activity and inflation unfold. “ (Huh?) As part of this journey, we will be mindful of the possibility that our stimulative monetary policy—while essential to achieving our inflation objective—could increase financial vulnerabilities.”
Knowing when or if Canadian interest rates rise or fall is Lost in Translation.