Bank of Canada to Wind Down Emergency Liquidity Programs

(Bloomberg) -- The Bank of Canada announced it’s winding down all its emergency liquidity programs, and provided guidance on how it plans to scale back the pace of their government bond purchases as the recovery picks up speed.

In a speech on Tuesday, Deputy Governor Toni Gravelle said the central bank will suspend its main short-term financing facility in May. The central bank also won’t extend three other asset purchase programs expiring in coming weeks for commercial paper, provincial bonds and corporate bonds.

More significant, Gravelle provided more insight into how the central bank is thinking about paring back its quantitative easing program -- fueling expectations policy makers could taper purchases of Canadian government bonds as early as at the next policy decision on April 21.

Tapering in April is “as near a certainty as these things can be,” Andrew Kelvin, chief Canada rate strategist, at TD Securities said by email. “If they were planning on maintaining bond purchases at these levels, it would’ve made sense to push back against tapering expectations.”

The Bank of Canada has been purchasing at least C$4 billion ($3.19 billion) in Canadian government bonds per week to help it keep market interest rates low.

“When we start gradually dialing back the amount of incremental QE stimulus that we are adding, we will eventually get down to a pace of QE purchases that maintains -- but not longer increases -- the amount of stimulus being provided,” Gravelle said.

Yields shot higher, with Canada’s 10-year benchmark at 1.529% as of 1:21 p.m. in Toronto, a move of nearly 15 basis points. The Canadian dollar spiked about one-quarter of a cent to trade at C$1.2530 per U.S. dollar as of 1:25 p.m.

Gravelle underscored what the “journey to this reinvestment phase” will entail:

• The process will be “gradual and in measured steps”
• Timing and pace of bringing purchases to net zero “will be guided by our evolving assessment of the macroeconomic outlook and the strength and durability of the recovery”
• Adjustments to the QE program are distinct from any change to the policy interest rate. “It won’t necessarily mean that we have changed our views about when we will need to start raising the policy interest rate”

Currently, the bank owns a little more than 35% of the total market of outstanding government of Canada bonds. Governor Tiff Macklem has said that when holdings rise above 50% market functioning could get distorted.

“As new information on the strength of the recovery arrives, Governing Council will continue discussions about gradually adjusting the pace of our QE related purchases,” Gravelle said.

Gravelle said the roll off of short-term funding facilities is likely to reduce the central bank’s balance sheet to about C$475 billion by the end of April, about C$100 billion smaller than its current level.

The bank also said it doesn’t intend to sell assets it owns from the corporate or provincial bond purchase programs that are expiring.

The bank’s decisions to end its emergency programs about a year after initiating them are a testament to the recovery in market functioning and global financial conditions.

“We can take these steps because now there is ample system-wide liquidity for financial institutions to draw from,” Gravelle said in prepared remarks before the CFA Society Toronto. He noted the bank can reactivate any market programs should stressed conditions ever re-emerge.

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