COVID-19: Canada scales back emergency operations as markets improve
08 June 2020 Toronto
Image: Number1411/Shutterstock.com
The Bank of Canada has begun winding down its enhanced liquidity provisions for the country’s financial markets after concluding that the impact of the pandemic-fuelled disruption “appears to have peaked”.
“After significant strains in March, short-term funding conditions have improved,” the bank has declared, and as such it will now reduce the frequency of its term repo operations to once per week, and its programme to purchase bankers’ acceptances to bi-weekly operations.
The central bank adds that it stands ready to “adjust” these programmes if market conditions warrant.
Its other enhanced programmes to purchase federal, provincial and corporate debt are continuing at their present frequency and scope.
Since March, the bank has committed to purchasing at least CAD 5 billion in Government of Canada securities per week in the secondary market.
It has also temporarily increased the amount of treasury bills it acquires at auctions to up-to 40 percent.
Also in March, the bank unveiled the development of a new provincial bond purchase programme of up-to CAD 50 billion, to supplement its provincial money market purchase programme.
Finally, its current corporate bond purchase programme allows the bank to acquire a total of $10 billion in investment-grade corporate bonds in the secondary market.
Rates maintained
The improving financial conditions have also allowed the bank to maintain its target for the overnight funding rate.
The overnight rate sits at the effective lower bound of 0.25 percent, while the bank rate is correspondingly 0.5 percent and the deposit rate is 0.25 percent.
The bank previously reduced its overnight rate by 50bps to its current level in March as part of a package of unscheduled rate policy tweaks aimed at providing support to the Canadian financial system and the economy during the worst episode of COVID-19 pandemic so far.
The next scheduled date for announcing the overnight rate target is 15 July.
New Standing Term Liquidity Facility is busy
March also saw the launch of the bank’s Standing Term Liquidity Facility (STLF), which had been in production since November 2019.
“Putting the STLF in place at this time means that it can play an important role as part of the Bank of Canada’s actions to help Canadians cope with the effects of the COVID-19 pandemic,” said the senior deputy governor, Carolyn Wilkins, at the time.
Under the STLF, eligible financial institutions can borrow from the Bank of Canada by pledging a broad set of collateral, including mortgages.
It was advised by the central bank that “given the current challenges in funding markets, it encourages Canadian financial institutions to use the STLF to support the liquidity needs of their clients”.
On 31 March, a day after the STLF went live, the central bank confirmed that a number of Canadian banks, including the six largest, had already accessed the facility.
“It is good to see Canada’s banks using this new standing facility,” said Stephen Poloz in one of his final statements as the Bank of Canada’s governor.
On 3 June Poloz handed over the reins to Tiff Macklen, formally the bank’s senior deputy governor, who has begun a seven-year term.
“It was designed to be used, and their participation shows that this facility is a helpful addition to our liquidity tool kit,” Poloz added. “I encourage all eligible Canadian banks to access the STLF to maintain the flow of credit to Canadian households and businesses.”
“After significant strains in March, short-term funding conditions have improved,” the bank has declared, and as such it will now reduce the frequency of its term repo operations to once per week, and its programme to purchase bankers’ acceptances to bi-weekly operations.
The central bank adds that it stands ready to “adjust” these programmes if market conditions warrant.
Its other enhanced programmes to purchase federal, provincial and corporate debt are continuing at their present frequency and scope.
Since March, the bank has committed to purchasing at least CAD 5 billion in Government of Canada securities per week in the secondary market.
It has also temporarily increased the amount of treasury bills it acquires at auctions to up-to 40 percent.
Also in March, the bank unveiled the development of a new provincial bond purchase programme of up-to CAD 50 billion, to supplement its provincial money market purchase programme.
Finally, its current corporate bond purchase programme allows the bank to acquire a total of $10 billion in investment-grade corporate bonds in the secondary market.
Rates maintained
The improving financial conditions have also allowed the bank to maintain its target for the overnight funding rate.
The overnight rate sits at the effective lower bound of 0.25 percent, while the bank rate is correspondingly 0.5 percent and the deposit rate is 0.25 percent.
The bank previously reduced its overnight rate by 50bps to its current level in March as part of a package of unscheduled rate policy tweaks aimed at providing support to the Canadian financial system and the economy during the worst episode of COVID-19 pandemic so far.
The next scheduled date for announcing the overnight rate target is 15 July.
New Standing Term Liquidity Facility is busy
March also saw the launch of the bank’s Standing Term Liquidity Facility (STLF), which had been in production since November 2019.
“Putting the STLF in place at this time means that it can play an important role as part of the Bank of Canada’s actions to help Canadians cope with the effects of the COVID-19 pandemic,” said the senior deputy governor, Carolyn Wilkins, at the time.
Under the STLF, eligible financial institutions can borrow from the Bank of Canada by pledging a broad set of collateral, including mortgages.
It was advised by the central bank that “given the current challenges in funding markets, it encourages Canadian financial institutions to use the STLF to support the liquidity needs of their clients”.
On 31 March, a day after the STLF went live, the central bank confirmed that a number of Canadian banks, including the six largest, had already accessed the facility.
“It is good to see Canada’s banks using this new standing facility,” said Stephen Poloz in one of his final statements as the Bank of Canada’s governor.
On 3 June Poloz handed over the reins to Tiff Macklen, formally the bank’s senior deputy governor, who has begun a seven-year term.
“It was designed to be used, and their participation shows that this facility is a helpful addition to our liquidity tool kit,” Poloz added. “I encourage all eligible Canadian banks to access the STLF to maintain the flow of credit to Canadian households and businesses.”
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