The Bank of Canada Stands Ready To Do Whatever It Takes
The Bank of Canada is taking unprecedented actions as the Canadian economy quickly deteriorates. COVID-19 has hit hard and put the global economy on life support. This month’s Monetary Policy Report (MRP) stresses a time of extreme financial stress across the globe. In a short time, we have seen record job losses, plunging confidence and many business closures. Adding fuel to the fire in Canada, oil prices have collapsed putting more stress on the Canadian economy.
The Bank’s MRP says:
“Until the outbreak is contained, a substantial proportion of economic activity will be affected. The suddenness of these effects has created shock waves in financial markets, leading to a general flight to safety, a sharp repricing of risky assets and a breakdown in the functioning of many markets.” It goes on to state, “The global and Canadian economies are expected to rebound once the medical emergency ends. The timing and strength of the recovery will depend heavily on how the pandemic unfolds and what measures are required to contain it. The recovery will also depend on how households and businesses behave in response. None of these can be forecast with any degree of confidence.”
“The Canadian economy was in a solid position ahead of the COVID-19 outbreak but has since been hit by widespread shutdowns and lower oil prices. One early measure of the extent of the damage was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April, some six million Canadians had applied for the Canada Emergency Response Benefit.”
“The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region. This means that the global economic recovery, when it comes, could be protracted and uneven.”
What’s The Future Hold?
This month’s MRP breaks tradition by not providing an economic forecast. Forecasts are useless as the number of unknowns is very high. However, the Bank analysis of alternative scenarios suggests the level of real activity was down 1% to 3% in the 1st quarter of 2020. The 2nd quarter is looking like a 15% to 30% declines in year-over-year activity. Inflation is forecast at 0%, mainly due to the drop in oil.
“Fiscal programs, designed to expand according to the magnitude of the shock, will help individuals and businesses weather this shutdown phase of the pandemic. They will support incomes and confidence leading into the recovery. These programs have been complemented by actions taken by other federal agencies and provincial governments.”
Central Banks Act In Unison
Central Banks around the world have been injecting liquidity into financial markets. They’ve done this by making large-scale asset purchases that sharply lower interest rates. The Bank of Canada has also reduced the overnight lending rate by 1.50% to 0.25%. This is considered the “effective lower bound.” Today, they left policy rates unchanged believing that negative interest rates are not appropriate policy responses. The Bank of Canada has also lent to financial institutions and asset purchases in core funding markets to the tune of $200 billion.
“These actions have served to ease market dysfunction and help keep credit channels open, although they remain strained. The next challenge for markets will be managing increased demand for near-term financing by federal and provincial governments, and businesses and households. The situation calls for special actions by the central bank.”
The Bank of Canada Supporting Financial Markets
In an effort to provide liquidity to the strained financial markets, the Bank of Canada has become a buyer of last resort. The Bank will continue to make weekly purchases of at least $5 billion in Government of Canada securities. They have committed to increase the level of purchases to maintain the proper functioning of the Government bond market. Finally, the Bank has temporairly increased the amount of Treasury Bills it acquires at auctions up to 40%, effective immediately.
The Bank of Canada announced relief for Provinces as well. A new Provincial Bond Purchase program of up to $50 billion will supplement its Provincial Money Market Purchase Program. They also announced a new Corporate Bond Purchase Program for $10 billion.
The Bank will support all Canadian Financial markets with the exception of the stock market.
“All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”
All of these measures are warranted. This is truly a black swan event that no one saw coming.