OTTAWA – Canada’s main central banker gave MPs a detailed defense of the Bank of Canada’s public debt buying frenzy on Thursday, saying it was aimed at lowering borrowing costs across the country.
The Bank of Canada has launched an unprecedented bond buying program that is effectively reducing borrowing costs for the federal government as its historic deficit grows.
It now owns just under a third of federal debt, with the bank believing it can step up those purchases before throwing a wrench into the credit markets.
But the purchases have put Bank of Canada Governor Tiff Macklem on a political hot seat, with Conservatives on Parliament Hill warning the central bank to appear too comfortable with the Liberals in power.
In an appearance before the House of Commons finance committee on Thursday, Macklem said the bank does not finance the federal government, but cuts the cost of borrowing for households and businesses.
He said the central bank would stop buying government bonds once the recovery is well underway, which will likely happen before inflation returns to the Bank of Canada’s 2% comfort zone. .
“Our actions by lowering interest rates and buying government bonds lower the cost of government funding. In fact, they lower the cost of borrowing for everyone, ”Macklem said.
“We don’t fund the government.”
The bond purchase program is the central bank’s first foray into what’s known as quantitative easing, which is a way for central banks to pump more money into the economy.
The central bank started the program by lowering its key rate to 0.25% to lower interest rates. The buying program was designed to lower rates even further on things like mortgages.
What the bank has done is buy back government bonds to stimulate demand and lower interest rates, especially for borrowers using three to ten year terms such as homeowners, home buyers. and businesses.
The bank’s balance sheet has swelled since March and now holds about $ 344 billion in government debt, or about 30% of federal debt, after buying about $ 163 billion in bonds.
Macklem said central banks can typically hold between 50 and 70 percent of debt before it begins to hurt credit markets.
The bank recently ditched gas for its purchasing program as market conditions improved, allowing it to reduce its total minimum weekly purchases to $ 4 billion.
Conservative finance critic Pierre Poilievre argued that the purchases inflated financial assets and enriched the mostly wealthy people who owned them to drive up inflation.
“Inflationary costs are borne disproportionately by the poor and the disadvantaged,” said Poilievre. “So you are effectively transferring a huge amount of wealth to those with financial assets, while diluting the wages of workers.”
Pressed by committee conservatives for a date on which the purchase will end, Macklem said the uncertain path of the pandemic prevented him from being able to circle a day on the calendar.
This report by The Canadian Press was first published on November 26, 2020.