“ QE does not release the government from its responsibilities ”: vice-governor of the BoC
Bank of Canada Deputy Governor Paul Beaudry gave a keynote speech Thursday in defense of the central bank’s quantitative easing program, seeking to dispel the notion that it was printing money to finance the huge federal government deficit.
In a video conference address to the Moncton, Fredericton and Saint John Chambers of Commerce, Mr. Beaudry pointed out that the QE program is designed to lower long-term interest rates to stimulate the economy – not to finance government spending. The central bank has purchased more than $ 180 billion in Government of Canada debt under the program since April.
“To put it simply: we don’t provide free meals for the government. The government will have to repay the bonds we buy under our QE program when they mature, ”said Mr. Beaudry.
“QE does not release the government from its responsibilities,” he said. “The sole purpose of QE is to lower the cost of borrowing for everyone in Canada, so we can help people get back to work and meet our inflation target.
The speech follows Wednesday’s interest rate decision, in which the bank kept its key rate at an all-time high of 0.25%. He also reaffirmed his commitment to the QE program, whereby he buys at least $ 4 billion a week in federal government bonds on the open market.
But as the bank held firm on policy and extensively reiterated the economic outlook it released at the end of October, Beaudry said a lot has changed beneath the surface of the outlook. The competing forces of the second wave of the pandemic on the one hand, and the arrival of vaccines on the other, are pulling the outlook in opposite directions – and this is forcing the central bank to re-evaluate its economic projections harshly, has t -he declares. .
“We have to really work hard to try to put all of these pieces together, to try to understand, when you have good and bad, where does it end – does it change your assessment?” Mr. Beaudry said at a press conference after his speech. “Right now, we haven’t really done all that work to be able to do it.”
The main negative risk, he said, is that the second wave closures will force businesses that have struggled throughout the pandemic to shut down for good. He said this could lead to an increase in “scars” on the economy, which would make the recovery more difficult.
“On the other hand, the vaccine is clearly more positive news, compared to [the October outlook]Said Mr. Beaudry.
In his speech, Beaudry said the bank still had a few policy tools if the economy were to “continue to deteriorate” – including, he said, the possibility of lowering its key rate to less. 0.25%. This is something the bank did not consider until recently; he always referred to 0.25 percent as the effective fund. He added that the bank still does not see taking rates into negative territory as a viable option.
“We’re just trying to reassess,” he says. “Maybe it’s still the right level. … The last thing we would like to do is something that would disrupt the functioning of the market. “
Mr. Beaudry’s speech was billed as the bank’s economic progress report – an update the bank provides regularly to follow up on interest rate decisions that occur between its quarterly monetary policy reports. . Yet the discourse was dominated by a detailed explanation of how the QE program works. This is proof that the Bank of Canada is concerned about perceptions of the program, amid criticism from the federal Conservative opposition that the bank allows excessive government spending – and dangerously widens its balance sheet in the process.
The bank’s asset purchases since the start of the pandemic have brought its balance sheet to more than $ 530 billion, down from around $ 120 billion. Just over half of this amount is made up of federal government bonds – accounting for about a third of the total supply of long-term government debt.
“There is a big difference between funding government and influencing the cost of government funding. With QE, the Bank of Canada is making the latter choice – we are lowering the cost of borrowing for the government. Most importantly, we lower the cost of borrowing for everyone in the economy. “
He also downplayed fears that the increase in the money supply would fuel soaring inflation.
“It is true that QE is designed to increase our current low level of inflation. That’s the whole point – to get us back close to our 2% target. 100, ”said Beaudry. “But rest assured, we will not abuse QE and will not exceed our inflation target range of 1% to 3%. The exit strategy from our QE program is tied to our inflation targets.
“We will continue quantitative easing until our economic recovery is well underway,” he added, reiterating the central bank’s forecast on its QE program.
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