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Canada Ramps Up Asset Buying to Backstop Virus-Slammed Economy

Shelly Hagan

(Bloomberg) -- Canada’s government and central bank are gearing up to acquire hundreds of billion of dollars in assets from the financial system in coming weeks in order to keep markets running smoothly during the pandemic-induced economic shutdown.

The national housing agency announced Thursday it will buy up to C$150 billion ($107 billion) of mortgages from banks, triple the amount announced two weeks ago, to pump money into the economy hit hard by social-distancing measures and mandated business closures. The Bank of Canada is likely to follow with its first foray into so-called quantitative easing soon, according to market watchers at Canada’s largest banks.

Although the central bank has already announced several programs aimed at unclogging credit markets, strategists expect Governor Stephen Poloz will need to introduce formal, large-scale asset purchases to keep borrowing costs low amid the layoffs of hundreds of thousands of workers.

“More stimulus is needed because of the size of the output gap, and the credit market stresses mean that QE is the ideal way of providing that stimulus,” Andrew Kelvin, senior Canada rates strategist at Toronto-Dominion Bank, said by email.

Over the past several weeks, both the Bank of Canada and the government have announced programs aimed at pumping cash into the financial system. They’ve done so by buying up billions of dollars in debt so banks can continue to lend to individuals and businesses in need during the pandemic.

QE Expectations

Toronto-Dominion predicts a two-part quantitive easing program totaling C$150 billion. This includes mostly purchases of Government of Canada bonds but also a smaller number of mortgage bonds. TD expects the first portion of the QE program -- between C$50 billion and C$75 billion -- to be announced at the central bank’s April 15 meeting, and the second in the third quarter, according to Kelvin.

Strategists at Bank of Montreal and Canadian Imperial Bank of Commerce expect a large-asset-purchase program of around C$100 billion. However, it has the potential to grow from there.

“The BoC will likely start with something under $100 billion, but that would quickly ramp up, especially if CMB and provincial spreads continue to widen,” Benjamin Reitzes, rates and macro strategist at BMO, said by email.

Next Moves

The Bank of Canada still has the highest policy rate among its Group of Seven counterparts, at 0.75%. Typically, QE programs are reserved for when rates are at or near zero, and a central bank needs some other tool to keep rates low. So, the expectation on the street is that the Bank of Canada will introduce a QE program once it lowers interest rates to 0.25%.

“There is no preset sequence for implementing unconventional policy -- but we expect the first round of asset purchases to be announced ahead of, or in conjunction with, a move to 0.00% for the overnight rate,” Kelvin said in a note to clients.

Most economists expect the bank to lower interest rates to 0.25% by its April 15 meeting.

The Bank of Canada has never in its history introduced a large-scale asset purchase program. During the financial crisis, it used forward guidance to bolster market confidence. But the extraordinary economic circumstance caused by the pandemic has investors calling for unconventional tools.

A formal quantitative easing announcement by the Bank of Canada would follow its international peers. The U.S. and the two Antipodean countries have embarked on such efforts.

“We can conceivably see the Bank of Canada attempting to size their QE program to be smaller than the Fed but somewhat larger than both Australia and New Zealand,” CIBC’s Ian Pollick wrote in a note.

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