Canada’s central bank didn’t do much today, but they did give us a new Tiff-ism for Christmas. The Bank of Canada (BoC) made no changes in its rate announcement this morning, the last of the year. They also updated the public on their promise not to accumulate government bonds, calling the balance “roughly constant.” What the heck does that mean? Well… it’s kind of like your car being “roughly in park.”
Bank of Canada Holds Rates, Says They Aren’t Expanding Government Bond Holdings
Canada’s central bank is holding rates, which shouldn’t have been a surprise. The BoC is keeping the 0.25% overnight rate and said they’ll continue executing its reinvestment plan. As of Nov 1, the BoC has promised to only buy Government of Canada (GoC) bonds to replace those rolling off its balance sheet. They said their holdings of GoC bonds are “roughly constant” this morning.
Roughly constant? You’re not the only one that thinks it’s an oddly imprecise description for a central bank. After all, this is an organization arguing the cost of debt rising 0.25% can blow up the economy. Let’s take a look at the actual data, shall we?
Roughly Constant Is Canadian-English For Buying $5 Billion
It turns out roughly constant means buying billions more in bonds. The BoC had $430.15 billion in GoC bonds on its balance sheet on Dec 1, 2021, increasing 0.65% ($2.8 billion from a month before. Since they said they would stop adding GoC bonds, the balance is 1.18% ($5.03 billion) higher. Who amongst us hasn’t accidentally bought $5.03 billion more of an asset than planned? Afterall, it’s roughly zero change from the original plan.
The “reinvestment phase” started in November, but the balance of bonds rose faster. From Oct 6 to Nov 3, the BoC’s holdings of GoC bonds increased by 0.49% ($2.08 billion). It appears the reinvestment phase involves buying more debt than the investment phase. Weird, but okay.
The term “roughly constant” is another Tiff-ism. These oxymorons have become a hallmark of the new governor’s management. It joins the ranks of “transitory, but long lasting” and “temporarily persistent.” These confusing policy statements might sound analytical but say nothing. The governor has even struggled to explain some.
The Bank of Canada’s Liquidity Injections Keep Credit Easy
Government bond yields influence the cost of all debt since markets are competitive. When the BoC acquires more, they’re essentially creating liquidity that suppresses rates. Even with low rates, the capital injection causes more generous credit conditions than the market would allow. As a result, the central bank is suppressing risk warnings to create more cheap credit.
Cheap credit sounds fantastic but also stimulates demand and exacerbates supply issues. Even if you’re producing a regular amount of supply, the increased demand can cause shortages. The result is often high inflation, which is the exact issue they’re saying they have no control over. It’s also the central bank’s only mandate, which they seem to be putting aside for political reasons.
Most finance professionals wouldn’t consider a one percent rise in 30 days to be a constant. It’s colossal growth — 12 points when annualized. That’s more than any portfolio could reasonably expect for regular growth. Now it’s a rounding error for the central bank’s management that can’t seem to figure out inflation.