In a speech, deputy governor Toni Gravelle said Tuesday the bank will suspend or discontinue market liquidity-focused programs beginning early April and then into May.
He said the bank can take these steps now because corporate and provincial borrowers have “unfettered access to fully functional debt markets.”
Gravelle added that credit spreads for most of these borrowers are at or below pre-pandemic levels, making it clear the bank’s involvement is no longer required.
The details of each transaction will be made public at the end of June.
The central bank had said it would adjust its pandemic programs as conditions required and the announcement Tuesday adds another sign that the economy is performing better than anticipated.
One year ago, the central bank became a lender of last resort when it started buying corporate and provincial bonds, and adjusted its lending rules to banks as the economy went into a nosedive.
The idea was to keep the plumbing of the credit system free from blockages so companies could finance operations as investors got cold feet.
At the same time as it started helping banks lend money, and improve market conditions for provinces and companies issuing debt, it also started buying federal government bonds as investors sold those as well.
What started out as a market functioning program turned into a quantitative easing program, Gravelle said, meaning the bank is now using the purchases to help lower borrowing costs for households and businesses.
By the end of April, government of Canada bonds are expected to make up more than 70 per cent of the central bank’s balance sheet, valued at roughly $350 billion.
The central bank will eventually wind down the pace of its federal bond purchases to maintain, but no longer increase, the amount of monetary stimulus in the economy, Gravelle said in the speech to CFA Society Toronto.
It would be some time after that the bank would look at raising its key interest rate from 0.25 per cent, which the Bank of Canada doesn’t foresee happening until 2023.
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Deloitte Canada chief economist Craig Alexander said adjustments to the quantitative-easing program will have to take into account how strong the recovery is, including how much the savings households accumulated through the pandemic gets turned into consumer spending.
“If that large pool of savings that has been accumulated suddenly starts to flood into the economy and consumers go on a buying spree, well, then obviously the Bank of Canada is going to have to accelerate the pace of their adjustment in terms of winding down the bond-buying program and raising rates.”
“It’s going to be very difficult to the Bank of Canada to time this, and a lot will depend on just how robust the recovery is.”
Gravelle said the central bank will review the actions it took to see what, if any, changes are required to respond to future episodes of market stress.
He added that senior officials are also looking at whether the country’s financial system needs structural reforms to minimize the likelihood that the central bank would have to step in again with what Gravelle called extraordinary actions.
“When central banks provide liquidity, we have to do so in ways that don’t encourage market participants to take undue risks in normal times,” Gravelle said in the text of his speech released by the bank.
“Our actions must be targeted at specific issues and scaled back as those are resolved.”
© 2021 The Canadian Press
World Bank sees ‘significant’ inflation risk from high energy prices
Energy Prices are expected to inch up in 2022 after surging more than 80% in 2021, fueling significant near-term risks to global inflation in many developing countries, the World Bank said in its latest Commodity Markets Outlook on Thursday.
The multilateral development bank said energy prices should start to decline in the second half of 2022 as supply constraints ease, with non-energy prices such as agriculture and metals also expected to ease after strong gains in 2021.
“The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries,” said Ayhan Kose, chief economist and director of the World Bank’s Prospects Group, which produces the Outlook report.
“The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession.”
The International Monetary Fund, in a separate blog https://blogs.imf.org/2021/10/21/surging-energy-prices-may-not-ease-until-next-year, said it expected energy prices to revert to “more normal levels” early next year when heating demand ebbs and supplies adjust. But it warned that uncertainty remained high and small demand shocks could trigger fresh price spikes.
The World Bank noted that some commodity prices rose to or exceeded levels in 2021 not seen since a spike a decade earlier.
Natural gas and coal prices, for instance, reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in 2022 as demand eases and supply improves, the bank said.
It warned that further price spikes could occur in the near-term given current low inventories and persistent supply bottlenecks. Other risk factors included extreme weather events, the uneven COVID-19 recovery and the threat of more outbreaks, along with supply-chain disruptions and environmental policies.
Higher food prices were also driving up food-price inflation and raising questions about food security in several developing countries, it said.
The bank projected crude oil prices would reach $74/bbl in 2022, buoyed by strengthening demand from a projected $70/bbl in 2021, before easing to $65/bbl in 2023.
The use of crude oil as a substitute for natural gas presented a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.
The bank forecast a 5% drop in metals prices in 2022 after a 48% increase in 2021. It said agricultural prices were expected to decline modestly next year after jumping 22% this year.
It warned that changing weather patterns due to climate change also posed a growing risk to energy markets, potentially affecting both demand and supply.
It said countries could benefit by accelerating installation of renewable energy sources and by cutting their dependency on fossil fuels.
(Reporting by Andrea Shalal; editing by Diane Craft)
Global Climate Policy Acceleration Means Sink-or-Swim Decade for Canada's Economy: Report – Canada NewsWire
OTTAWA, ON, Oct. 21, 2021 /CNW Telbec/ – Canada’s economy faces a “sink-or-swim” decade, according to the first study to assess Canada’s economic prospects in the face of accelerating global market shifts responding to climate change.
Sink or Swim: Transforming Canada’s economy for a global low-carbon future is a major new report from the Canadian Institute for Climate Choices, Canada’s independent climate policy research institute. The report assesses Canada’s economic prospects in response to the global low-carbon transition and offers recommendations for successfully navigating that transition.
Countries responsible for over 70 per cent of global GDP and over 70 per cent of global oil demand have committed to reaching net zero emissions by mid-century. Trillions of dollars in global investment will move away from high-carbon sectors. The impact of these global shifts will be profound, shifting trade patterns, reshaping demand, and upending businesses that are too slow to adapt.
To better understand the risks and opportunities of this transition for Canada, Sink or Swim stress tests publicly traded companies under different scenarios. Without major investment, the report finds, many exporters and multinationals will see significant profit loss in the coming decades. The stakes are high for Canada, with almost 70 per cent of goods exports and over 800,000 jobs in transition-vulnerable sectors, including oil and gas, mining, heavy industry, and auto manufacturing.
To succeed in this global transition, the report concludes, Canada must use climate policy, company disclosure, and targeted public investment to mobilize private finance and improve the resilience of Canada’s workforce and impacted communities.
“Our analysis shows that global policy and market changes will have a profound impact on Canada’s economy and workforce. To stay competitive, Canada needs to rapidly scale up new, transition-consistent sources of growth—and successfully transform existing ones. Moving too slowly is now a greater competitive risk than moving too quickly.”
—Rachel Samson, Clean Growth Research Director, Climate Choices
“The global transition means Canada must transform its economy in the face of new market realities. With smart, certain policy and innovation across the private sector, there is a path to strong economic growth, gains in well-being, and lower emissions.”
—Don Drummond, Stauffer-Dunning Fellow and Adjunct Professor at the School of Policy Studies at Queen’s University and fellow-in-residence at the C.D. Howe Institute
“Major Canadian investors understand the pressures our economy will be facing as a result of accelerating global market shifts, and we’re issuing a strong call for increased climate accountability and transparency in the corporate sector.”
—Dustyn Lanz, CEO, Responsible Investment Association
“The Aluminum Association of Canada supports a holistic view of Canada’s trajectory towards net zero emissions. A multifaceted approach with room for everyone will support a transition to a prosperous and sustainable economy.”
—Jean Simard, President and Chief Executive Officer of the Aluminium Association of Canada
“Canadian businesses and investors need clarity on which economic activities are consistent with the transition to a low-carbon future. Without that clarity, there is a risk that finance will flow in the wrong directions and miss areas of great opportunity. The analysis in this report will support the development of practical taxonomies that can be used for transition-consistent investment decisions and financial products.”
—Barbara Zvan, CEO & President, University Pension Plan and member of Canada’s former Expert Panel on Sustainable Finance. UPP is a participating organization of the Sustainable Finance Action Council
ABOUT CLIMATE CHOICES
The Canadian Institute for Climate Choices is Canada’s independent climate policy research institute, providing evidence-based policy analysis and advice to decision makers across the country.
SOURCE Canadian Institute for Climate Choices
For further information: Catharine Tunnacliffe, Director of Communications, (226) 212-9883
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