BOC Extends QE to Provincial and Corporate Bonds, while Leaving Rate at Lower Bound

After three cuts, 150 bps in total, in March, BOC left the policy rate unchanged at 0.25% at the April meeting. With the policy rate standing at the lower effective bound, the central bank added further monetary easing by extending the QE program. Unlike previous meetings, BOC did not provide the updated economic projections this time. Rather it used scenario analysis to estimate the level of real GDP and inflation outlook. The best scenario-a V-shaped recovery- requires removal of containment measures at the end of May.

As noted in the statement, the coronavirus pandemic has “caused a sudden and deep contraction in economic activity and employment worldwide”. The global economic recovery “could be protracted and uneven”. Domestically, BOC highlighted the sharp decline in the number of payrolls in March and projected a GDP contraction of 1-3% in 1Q20, followed by 15-30% decline in 2Q20, when compared with 4Q19. Headline CPI is estimated to slow markedly to 0% in 2Q20. It, however, admitted that the uncertainty is high.

Given the highly uncertain developments in the pandemic, hence the economic outlook, BOC’s economic projections this time are qualitative, offering two scenarios for the economy. The best scenario would require “the beginning of the lifting of containment measures at the end of May or something like this, late May or early June and then you get the economy gradually picking up traction”. An alternative one would extend that by several months and lead to a deeper downturn and more gradual recovery. Governor Stephen Poloz suggested that the“best case scenario is still achievable”.

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Since BOC is reluctant to adopt a zero and negative interest rate, it has joined the QE camp late last month. At the April meeting, the central bank announced that it will launch a Provincial Bond Purchase Program of up to CAD50B, in addition to an existing program that buys provincial short-term paper. The central bank will purchase CAD-denominated bonds issued by all provinces and fully-guaranteed provincial agencies with remaining terms-to-maturity up to 10 years. Furthermore, under a new Corporate Bond Purchase Program, BOC will acquire up to CAD10B of senior secured and unsecured bonds originated by Canadian companies with a remaining maturity of up to 5 years and a minimum credit rating of BBB or equivalent. Both programs will begin in early May and last for up to 12 months. BOC pledged to “adjust the scale or duration of its programs if necessary”. Besides, monetary policy, BOC added that fiscal policy measures “will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery”.