Bank of Canada Expands Authority to Buy and Sell Securities

Stephen Poloz leaves a news conference in Ottawa on March 18, 2020.  Photographer: David Kawai/Bloomberg

The Bank of Canada has expanded its authority to buy and sell securities outright, according to a public notice by the central bank.

The central bank added the right to buy and sell the debt of companies and municipalities, along with other instruments when it is “addressing a situation of financial system stress that could have material macroeconomic consequences,” according to the March 13 notice in the Canada Gazette issued by Governor Stephen Poloz. Those amendments add to the central bank’s power to conduct buybacks on various products, including corporate debt.

“The ability to purchase securities outright is a crucial step in arresting the impairment in system-wide liquidity in Canada” Ian Pollick, Global Head of FICC Strategy at the Canadian Imperial Bank of Commerce, said by email. “Price-discovery has collapsed on the back of these stresses, so it is crucial for the Bank to respond in-kind with a program that targets both public and private sector assets.”

Spokeswoman Louise Egan confirmed the amendments were made primarily to enable the central bank to conduct operations under its new Bankers’ Acceptance Purchasing Facility. The changes are significant because the central bank can now make outright purchases of securities that were previously only allowed to be acquired via term repo buybacks.

The central bank has taken a series of measures to inject liquidity into the country’s financial system, to prevent funding markets from seizing up. Analysts say it may be forced to introduce a more formal quantitative easing program as the country contends with a dramatic rise in unemployment.

Bank economists now expect the Canadian economy to shrink between 10% and 24% on an annualized basis, a recession deeper than the worst of the 2008–09 financial crisis. Many see it as inevitable that Poloz and his governing council will cut the overnight rate to near zero, then start rummaging deeper into their toolbox.

“We think the bank will be forced to adopt QE and that they’ll look to ultimately buy up to C$150 billion in securities,” said TD Securities macro strategist Robert Both in an email. “We think it is a question of when and not if.”

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Source: Erik Hertzberg | Bloomberg