As Stephen Poloz goes into his penultimate policy decision as Bank of Canada governor on Wednesday, economists are trying to gauge how much of a buying mood he’s in.
With the country suffering one of its sharpest downturns since the Great Depression, Poloz is widely expected to dig deeper into his unconventional toolkit, whether that’s at the April 15 meeting or later. His term expires June 2, which means he’ll also oversee deliberations for the central bank’s next statement on June 3.
The central bank has already cut interest rates to near zero and injected $150 billion into financial markets with a program of asset purchases. Additional measures could include following the Reserve Bank of Australia’s recent move into yield curve control, introducing more explicit forward guidance on future policy intentions, or broadening asset purchases to include long-term provincial securities and corporate debt.
One thing he’s not expected to do with the 10 a.m. statement on Wednesday is lower the Bank of Canada’s policy rate below the current setting of 0.25 per cent, which Poloz has said is the effective lower bound.
Do you think Stephen Poloz’s term at the Bank of Canada should be extended?
What Bloomberg’s Economists Say
“While the overnight rate is at the effective lower bound, an expansion of large-scale asset purchases to include corporate debt or provincial bonds is a compelling target.”
The Bank of Canada embarked on its first ever large scale asset purchase program last month. The move to buy at least US$5 billion of Canadian government bonds each week, on top of almost $100 billion of securities purchased under resale agreements, will help sop up the massive amount of debt the federal government is expected to issue in coming months to finance its stimulus package.
That program could easily be expanded to include other asset classes, with longer-dated provincial bonds the most likely option, according to Derek Holt at Scotiabank. That’s one corner of the credit markets still experiencing strained credit conditions, at a time when provincial governments are looking to finance growing deficits.
By targeting provincial debt, “you’d be saying ‘look, we’ve got your back,’” Holt said in a phone interview, adding that would likely have beneficial effects on borrowing costs for municipalities, agencies and large corporations. Though one difficulty is political: how much of each province’s debt to buy?
The central bank could also increase weekly purchases to more than C$5 billion, or buy more non-government debt such as mortgage bonds or corporate securities.
Right now, the bank is acquiring assets primarily to restore proper functioning of financial markets, which is why much of the buying has been at the shorter end. But as markets return to more normal conditions, it will eventually need to shift its focus to stimulating the economy. To do that, officials will need to target longer-term borrowing costs where most of the funding for households and businesses takes place, a practice known as quantitative easing.
There are doubts whether QE can be effective in smaller countries like Canada whose long-term bond yields are dictated by monetary policy in other countries. But the practice can be much more effective if the asset buying is concentrated around specific maturities, what economists call yield curve control.
Focusing on the five-year part of the curve would be the most compelling move, according to Ian Pollick at Canadian Imperial Bank of Commerce. “To do this, they would likely target a ‘zone’ for yields in a part of the curve that matter most for businesses and households, which in our view is the 5-year tenor of the curve,” Pollick, global head of non-equity market research, said in a report.
Australia’s central bank adopted a similar policy last month, when it announced a target for three-year government bonds of around 0.25 per cent.
The central bank may also commit to specific monetary policy intentions for a certain period, a tool known as forward guidance. Promising to keep rates low for a long time reduces the risk of a spike in funding costs, allowing banks to offer lower rates to households and businesses than they otherwise might.
Poloz provided a sliver of guidance when he promised last month to continue buying assets until the “economic recovery is well underway.” More clarity around that promise could help cement expectations that interest rates will remain low for much longer.
--With assistance from Esteban Duarte.