MNI POLICY: BOC Buys Provincial, Corporate Bonds, Holds Rate

--Governor Poloz Uses Last Meeting To Affirm 0.25% Is Lower Rate Bound

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada announced a historic expansion of asset

purchases into provincial government bonds and said its key interest rate will

hold at the lower bound of 0.25%, with policy makers prepared for more to

sustain the economy through a record slump.

     The central bank will buy up to CAD50 billion of provincial bonds and up to

CAD10 billion of investment-grade corporates, on top of affirming plans for

least CAD5 billion a week in federal debt purchases. Term repos are also being

expanded out with financing to 24 months. 

     Canada's GDP may drop 15-30% in the second quarter from the fourth quarter

of last year, likely the worst downturn on record, though the BOC declined to

give a regular forecast citing uncertainty from the COVID-19 pandemic.

Statistics Canada earlier today gave a nowcast showing GDP fell a record 9% in

March and 2.6% in the first quarter.

     "The next challenge for markets will be managing increased demand for

near-term financing by federal and provincial governments, and businesses and

households. The situation calls for special actions by the central bank," the

BOC said in its policy decision. "The Bank's Governing Council stands ready to

adjust the scale or duration of its programs if necessary."

     Inflation will slow to around zero this quarter as gasoline prices and

overall demand tumble, the BOC said. A chart in its forecast paper showed a

worst-case scenario where prices decline through early 2021.

     "While there may be a rebound in growth, output is likely to remain below

pre-pandemic levels for some time," policy makers led by Governor Stephen Poloz

said in a Monetary Policy Report that accompanied the rate decision. "The

uncertainty and scarring effects of the recession on confidence and production

capacity could prolong the recovery substantially."

     Poloz switched to make asset purchases the driver of policy last month

after cutting rates 150bps to what Poloz says is the effective lower bound. The

package has no modern precedent and returns the BOC to its roots when it opened

in 1935 to fight the Great Depression.

     --BALANCE SHEET

     The BOC's balance sheet has almost doubled to CAD275 billion in just two

weeks, far more than during the global financial crisis a decade ago. Most new

money has been for repos and short-term bank credit, while the slim CAD2 billion

of provincial debt purchases contrasts with leaders demanding help to fund

health budgets.

     The BOC has committed to buying federal debt until the recovery is well

underway, which economists say likely means something like CAD200 billion.

     Credit markets will be "strained for some time" because of the pandemic,

which is hurting the transmission of monetary policy, the BOC said. Stress tests

show major lenders can weather a severe downturn. 

     All these policies could be revisited soon, including Poloz's reluctance to

push rates to what the BOC had said was a lower bound of -0.5%. He is due to

retire after a seven-year term on June 2. The next policy meeting is June 3. 

     The BOC declined to give much forward guidance on the policy rate. Last

month Poloz committed instead to buy federal debt until the recovery was well

under way.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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