Bank of Canada announces actions to Support the Economy and Financial System
Press Release Bank of Canada March 24, 2020 @ 12:50 PM
The COVID-19 pandemic represents a serious health threat to people around the world, and a significant disruption to daily life. It is having a major impact on the global and Canadian economies. Every sector of the Canadian economy will be affected. Some sectors, such as the energy, travel and hospitality and service industries, are being particularly hard hit.
The public health actions needed to contain the spread of the virus, such as school closures, states of emergency, and social distancing measures, while necessary, are themselves going to significantly impact economic activity.
However, it’s important to underscore that while the impact is large, it will be temporary. Authorities around the world have taken bold and necessary measures to contain the spread of the virus and to support people and businesses through a very challenging time.
What the Bank is doing Our immediate goal is to help Canadians bridge this difficult period by making credit
affordable and available. As many economic activities are temporarily shut down, companies rely on credit to continue to pay their employees, and households need credit to continue spending to meet their basic needs. But they may be unable to borrow if financial turmoil curtails lending activity.
The central bank must therefore intervene to prevent a sudden contraction of credit when credit is most needed. If Canadians can’t borrow to weather this economic storm, the impact on the economy would be worse, the recovery will take longer and there will be long-lasting damage to Canada’s productive capacity.
Achieving our primary mandate of keeping inflation close to target requires us to stabilize the economy and employment first. In normal times, we can achieve our inflation objective by setting the policy interest rate at the appropriate level. However, during major disruptions to the economy and financial markets such as those we are experiencing with COVID-19, we need to take more comprehensive measures to ensure that the financial system continues to play its role of providing credit where it is needed.
For these reasons, the Bank of Canada is acting in several ways to support the economy and financial system and stands ready to take any and all actions that we can to protect the well-being of Canadians during this difficult time.
Monetary policy We have lowered interest rates to support economic activity and keep inflation low and stable. These moves work by lowering payments on existing and new loans throughout the economy. The Bank has additional tools in its monetary policy toolkit that can be used to further support the economy and achieve the inflation target.
Support to key financial markets We are intervening to support key financial markets to ensure they continue to function properly. These interventions include an expanded buyback program for Government of Canada bonds and expanded purchases of Canada Mortgage Bonds (CMBs). In times of market turmoil, financial institutions may be reluctant to act in their normal role as market makers for bonds and other financial assets. Market makers hold inventories of securities and quote prices at which they will buy and sell—activities that may become prohibitively risky when the prices of these securities are fluctuating widely. Buyers and sellers may then find it difficult to trade—in other words, the market becomes illiquid.
This is particularly problematic in the case of friction in the market for Government of Canada bonds, which are often held as the safest Canadian-dollar asset. Those holding a bond may find it difficult to sell it to obtain cash, while those wishing to buy a bond for its safety may be unable to obtain it. Given the central role of Government of Canada bonds, including as a benchmark for other interest rates, such market illiquidity can have pervasive effects through the financial system. As the liquidity of markets for certain maturities of Government of Canada bonds has been diminished through this period, the Bank of Canada, as fiscal agent of the Government, has expanded a program of buybacks, whereby it offers to purchase less-widely-traded bond issues from investors and sells more-widely-traded ones in return. Canada Mortgage Bonds (CMBs) are another key financial market in Canada. Financial institutions use CMBs to finance their mortgage lending to Canadian homeowners. The functioning of this market was also becoming impaired amid broader market turmoil. In response, the Bank of Canada introduced a program of purchasing CMBs. This helps provide the means for financial institutions to renew mortgages during this period, as well as supports the flow of credit more generally.
We also launched the Bankers’ Acceptance Purchase Facility (BAPF).
The Bankers Acceptance market is one of Canada’s core funding markets and a key source of financing for small- and medium-size corporate borrowers. In addition, the Bank announced a new program to support the liquidity and efficiency of provincial government funding markets. The Provincial Money Market Purchase (PMMP) program will support a liquid and well-functioning market for short-term provincial borrowing.
Liquidity support for financial institutions Given that the size and duration of the impact of COVID-19 are highly uncertain, credit markets may become impaired. This is both because financial institutions face difficulties in obtaining funding for their lending as well as because they may become reluctant to lend in fear that many borrowers may be unable to pay. The problem of funding is partly system-wide and partly specific to individual institutions: in the context of market turmoil there is a generalized desire for safer assets, but even if that demand is satisfied in aggregate, some financial institutions may have difficulty obtaining funding.
Our interventions have thus far included ready access to funding by lengthening the term over which we lend money to banks, widening the collateral we accept to provide lending, and expanding the list of eligible institutions that can access our lending. Widening accepted collateral helps in two ways: it enables institutions holding that collateral to obtain financing so they can continue other lending, and it supports the functioning of markets for those assets accepted as collateral. As the economic impact of COVID-19 grows and businesses and individuals seek more funds from their lines of credit, the Bank will take the necessary measures to ensure credit continues to flow.
At the same time as we are providing liquidity to the financial system as a whole, we are also prepared to help viable financial institutions who face challenges in these choppy markets. We have established a new Standing Term Liquidity Facility (STLF) to help banks better manage their liquidity risks and continue to provide their customers with access to credit. To access the STLF, financial institutions can pledge a broader set of collateral, including mortgages, which significantly increases their funding capacity. The Bank of Canada encourages the use of the STLF by banks to help them continue to provide loans to households and businesses when they need it most.
Our actions work together The actions we are taking are mutually reinforcing:
Liquidity support for financial institutions improves market functioning
Well-functioning markets positively affect the ability of financial institutions to operate
Monetary policy easing (a lower interest rate) is more effective when markets are functioning, and banks have the liquidity they need to lend to business and households.
International co-operation The Bank is also coordinating its actions with international policy makers, such as G7 central banks, and economic and financial partners in Canada. For example, during the global financial crisis of 2007–08, the Bank established US-dollar swap lines with other central banks to ensure Canada’s financial institutions have access to US dollars. Most Canadian banks have US branches or subsidiaries and thus have access to US-dollar funding through the Federal Reserve’s discount window, so these swap lines weren’t used at the time. Nevertheless, should a Canadian bank need to borrow in US dollars, the swap lines give the Bank of Canada the ability to meet that need. This facility provides the Bank with additional flexibility to address rapidly evolving developments in financial markets.