Canada

The Bank of Canada Held Rates and Dropped A Fib About Buying Government Bonds

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.

11 Comments

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  • Gerald Haw 2 months ago

    One of the few positives of the pandemic has been the public finding out the central banks aren’t these geniuses socked away in back rooms with calculators that understand issues better than the public, but greedy jerks that assume if they tell the average person they don’t understand something, no one will question what they say.

  • HFX Realtor 2 months ago

    The Bank of Canada has no choice, they have to absorb a certain whatever the market won’t for the government’s spending, or rates rise.

    Now intentionally misleading the public on the issue is an odd choice for them to make.

    • Michael Westen 2 months ago

      Actually, that choice is right on the money for a central bank these days. See: US Fed retiring the word “transitory” for inflation when everyone else (especially experts) knew it wasn’t going away. Seeing the Bank of Canada react in a slow and pathetic pace behind the US’ decision to raise rates is business as usual.

  • Nassim 2 months ago

    I’m laughing, but I can’t tell if it’s just to keep me from crying.

    I read the press release and didn’t realize how odd it is to use “roughly constant” in the opening paragraph. It’s not commentary, it’s supposed to be a fricken update from a central bank.

    https://www.bankofcanada.ca/2021/12/fad-press-release-2021-12-08/

  • Sara 2 months ago

    I lost my respect for the BOC ! I am very disappointed…

    They deliberately ignored all the signs and warnings from the banks and the economists. They continued what was the best for them and not the people. On top of that, they made announcements using the confusing wording to cover up their acts. Shame…

  • Jappan Singh 2 months ago

    Is Canada a free country? Looks like it is run by the real estate mafia for the real estate mafia.

  • Cholds 2 months ago

    At some point, you have to wonder if it wouldn’t be simpler and more efficient to have an actual plan for how things will go based on inflation. Things like, if inflation is above 2.5% we raise rates by 0.25, and if it’s above 3% we raise rates by 0.5, every meeting, until it hits our target. And vice versa.

    You’d accomplish the goal of making the system reliable, and also take out the idiocy that is the leaders of central banks. Also you’d prove that a trained monkey (or dog, or crow, the list goes on) can do the most essential and important part of the bank of canada’s job more effectively than they can. Most importantly, if things want or need to change, you’d have to justify it based on numbers, not guesswork.

    A guy can dream, right???

  • Mike 2 months ago

    Think “roughly constant” = “constant after adjusting for inflation”

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