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The asymmetrical effects of COVID-19 on other sectors and others in the economy: Tiff Macklem, governor of the Bank of Canada, speaks through a video convention to the Canadian Chamber of Commerce. (12:30 p. m. (East Time) approximately)
These forecasts are for the Governing Council in preparation for financial policy decisions and are published once a year with a five-year gap.
Let’s see why we do those transactions and how they work.
Given the effects of the pandemic, the Canadian economy wants a well-functioning monetary formula. Our economy is based on credits. When the monetary formula works, spaceowners and businesses have access to credits; for example, others may apply for a loan to buy a space or use a line of credit to pay for their children’s braces. create jobs so that they can obtain loans from investors in money markets.
When the pandemic erupted, activity in many money markets stopped altogether. Few investors sought to buy assets, but the maximum sought to sell them for more cash. In response, the Bank has introduced several systems to make these markets work more normally. We started buying Canadian loan bonds, advertising paper, bank acceptances, corporate bonds, and federal and provincial debt. These purchases have helped repair market activity and are helping to maintain credits for Canadian businesses and households.
A key program is our canada government bond purchases. This is because costs in the government bond market place assistance costs in almost every other place on the credit market. And when it works well, Canadians can benefit from our very low political interest rate.
Now that money markets are working well again, our asset purchases can run our traditionally low interest rate to inspire spending and investment. The aim is for the call for families and businesses to be sufficient to fit what the economy can produce. When spending is high enough, the economy will function close to its capacity, resulting in full employment and approaching target inflation.
That’s how it works. When the Bank of Canada buys bonds, it increases the value of bonds and reduces their yield or yield. Lower yields make credits less expensive. And encourage families and businesses to borrow so they can spend and invest. is called quantitative easing, or QE shortly.
EQ can inspire the spending and investment of family and businesses in a variety of ways. For example, if our purchases reduced the yield on government bonds to five years, this would result in a five-year decline in fixed-rate mortgage interest rates. it’s less expensive to borrow to buy a house.
EQ also stimulates the economy in other ways. This can make banks more likely to offer loans to families and businesses. Our purchases leave banks more liquid, allowing them to lend to more borrowers.
In addition, the QE sends a signal that we intend to keep our key interest rate low for a long time, as long as inflation remains under control. This is a technique we use after we have lowered our policy rate as much as possible. If the economy wants an EQ, it also wants our key rate to be as low as possible. By giving investors more certainty that our one-day interest rate target will remain low, QE can lower long-term loan prices for businesses and households.
The Bank also buys existing corporate bonds. This can help the economy by making it less expensive for companies to invest and create more jobs. In general, companies pay a higher interest rate than governments to borrow money. Our purchases can reduce this difference in interest rates paid through companies and governments when issuing bonds. This makes it less difficult for companies to borrow so they can invest in hiring or expanding their business. This is known as credit reduction or EC.
For QE and THE EC, we purchase assets from monetary institutions, corporations or governments.
How do we pay for those assets? There is the misconception that we only print money, but we do not, we pay those purchases with agreement balances, in fact, the balances of agreements act as loans from monetary establishments, when we buy assets, we take loans from monetary establishments by crediting them with a deposit of the balances of the agreement in the accounts they have in the Bank of Canada. Like the deposits you have in your bank, the balances of the agreement accrue interest. At this time, we are paying an interest rate of 0. 25 consisting of penny in settlement balances, as well as our key interest rate.
Why would monetary establishments sell us assets in exchange for a deposit?For monetary establishments, agreement balances are useful because:
To acquire the assets, we organize an auction, we buy from the monetary establishment that is willing to sell them to us at the lowest price.
Finally, when the crisis has passed and we no longer need to maintain the assets, we can sell them to the monetary institutions, this will cause their agreement to settle the deposits, or we can keep the assets until adulthood and use the income up to the amount of agreement. Balances.
Like all our political actions, our asset purchases are guided by a desire to reach our 2% inflation target. Low, solid and predictable inflation is the Bank of Canada’s number one mission. Remember that the purpose of these purchases is to stimulate the call. When demand and spending adjust to what the economy can produce, we can keep inflation close to our 2% target.
But if we detect that spending is rising too fast and inflation threatens to take off, we can act to keep inflation under control. For example, we can simply raise our key interest rate to slow economic activity and keep inflation under control. you can prevent our asset purchases and cancel them.
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