The Canadian economy is improving faster than expected, meaning supports can start fading. Bank of Canada (BoC) deputy governor Gravelle announced the end of many market support programs on Tuesday. The economy has improved, meaning the gradual withdrawal of stimulus can now begin. As supports begin to taper, overly easy credit is likely to disappear as well.
Most Emergency Market Supports To End By May
The BoC will end market support, finding there’s more than enough liquidity. In a note to institutions, BMO macro strategist Benjamin Reitzes said, “the remaining market support programs will conclude as scheduled and as expected over the coming weeks and months.” If everything goes smoothly from here, that would see the following programs end:
- Apr 2 : The Commercial Paper Purchase Program (CPPP)
- Apr 6 : Contingent Term Repo Facility (CTRF)
- May 7 : Provincial Bond Purchase Program (PBPP)
- May 10: Term repo operations will end, with the final operation on May 4
- May 26: Corporate Bond Purchasing Program (CBPP)
BoC Does Not Plan To Liquidate Assets Soon
One major concern has been, if the central bank ends support — will it liquidate the assets? Ending the purchasing of the assets means no longer adding liquidity to the market. Selling these assets would mean removing liquidity from the market. The latter doesn’t appear to be a near-term concern, as many expected.
The strategist called attention to the BoC’s statement on asset liquidation today. “The Bank does not currently plan to sell any of the securities acquired under these programs,” said Reitzes. “This isn’t a surprise either, but could ease some potential angst related to the possibility (even if remote) of potential selling.”
Tapering Quantitative Ease
The biggest takeaway is QE will begin to taper soon. “On the QE front, Mr. Gravelle’s speech should serve to reinforce that tapering is coming in April. When discussing the relative size of the BoC’s QE program, he initially says that the program is in line with international peers as a share of GDP.”
Reitzes also notes, “[Gravelle] then goes on to say that ‘By another measure, however, our purchases stand out. Our GoC bond purchases since last March represent a little over 35 percent of the total amount of GoC bonds that are outstanding—by far the highest among this group of central banks.’”
If government spending “falls heavily as expected,” tapering would be needed as the ratio scales. Reitzes also mentions the size of bond buying is actually closer to 40%, but who’s counting?
Tapering Could Mean An End To Easy Money
Tightening the slack on loose monetary policy often has an adjustment period. Since asset prices are based on future expectations, asset prices may need to adjust. Even though policy will only tighten slowly, the expectation of easy money will fade.
As Reitzes observed, “The initial market reaction was selling, pushing GoC yields higher and provincial spreads wider, but that was an overreaction to headlines as these moves we fully expected. The market quickly retraced most of those moves.”
Earlier this month RBC economist Josh Nye said he was watching for a taper to occur in April. If this happens, he believes it’s a sign the economy is recovering faster than expected. In that case, he sees the BoC revising their outlook. This can mean rates will rise sooner than expected.
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