The Bank of Canada has learned lessons from its management of the crisis caused by the pandemic, and if it had to be done again, it would act differently.
This is the admission made on Wednesday by the deputy governor of the central bank, Toni Gravelle, who was invited to the Conference on financial services of the National Bank.
In his speech, he explained that buying federal government bonds is a monetary policy tool that the Bank of Canada often uses, but at the start of the pandemic, it bought federal bonds massively for another purpose, that of supporting the financial markets.
This is called quantitative easing, which she had never done before.
If it had to be done again, she would act differently, according to the deputy governor.
The Bank of Canada will specify the size and duration of its bond purchases at the outset. “The program will be temporary and will take place over a relatively short period, determined in advance,” said Toni Gravelle.
Failure to be so clear has left room for speculation on monetary policy measures, he suggested. Financial markets can thus come to believe that they can take unusual risks without suffering the consequences if things go wrong, he said.
“In other words, because the central bank intervened once, they come to expect it to intervene again at the slightest sign of stress in the markets. »
It should be clear to everyone that such interventions are made on an exceptional basis, he stressed, “in extreme situations where the entire financial system faces funding constraints”.
“The bar is very high for us to again use the massive purchases of Government of Canada bonds to support the functioning of the markets,” he assured.
If it had to be done again, the Bank of Canada would not wait so long before beginning a return to normal, also indicated the Deputy Governor.
For the past year, the monetary authorities have undertaken to reduce their balance sheet inflated by the pandemic, what is called quantitative tightening.
“By selling them soon after this return to normal, we will be able to bring our balance sheet back to its original size fairly quickly,” said Toni Gravelle.
The quantitative tightening that began a year ago could be long, the deputy governor said, and end in late 2024 or the first half of 2025.
The Bank of Canada is still working to restore supply and demand, the deputy governor said. “Inflation as measured by the consumer price index continues to be expected to decline in the coming months, but core inflation will need to slow further to return to the 2 target. %. »
The Bank of Canada’s next interest rate decision and assessment of economic conditions will be known on April 12.
