MNI POLICY: BOC Calibrates QE to Scale Back Bill Purchases

The Bank of Canada said Tuesday it would reduce participation in government money-market auctions to 10% from 20%, the kind of calibration Governor Tiff Macklem said last week would be made as conditions changed through the comeback from Covid-19.

"The Bank of Canada continues to closely monitor global and domestic market developments and remains committed to providing liquidity as required to support the functioning of the Canadian financial system," according to a market notice from Ottawa. "The Bank may adjust its purchase percentage further if market conditions warrant." The changes take effect Sept. 21.

The scaling back of federal t-bill purchases carries more weight with the BOC's holdings ballooning to CAD140 billion from CAD26 billion between April and July, before fading to CAD103 billion last week. Provincial government money-market holdings were CAD7.4 billion last week.

The decision puts more focus on the main QE policy of buying at least CAD5 billion a week in federal government bonds until the recovery is well underway. Governor Macklem has also said interest rates will remain at a record low 0.25% until a 2% inflation target is sustainably met, something the BOC's forecasts show won't happen before 2023.

Lower purchases of corporate repos and the fade in t-bills has already shrunk the balance sheet to CAD535 billion from a July peak of CAD547 billion, and this move suggests further declines.