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Rising interest rates are helping to ease price pressures in Canada and inflation is easing; Progress toward the 2-cents-for-penny target has been slow. The Bank expects inflation to remain around 31/2 per cent until mid-2024, returning to target in 2025.
New Year’s Eve Address: Governor Tiff Macklem speaks at the Canadian Club Toronto (approximately 12:40 p. m. m. , Eastern Time).
These forecasts are presented to the Governing Council in preparation for financial policy decisions and are published once a year with a five-year delay.
In the days and weeks following the arrival of the COVID-19 pandemic in Canada, the Bank of Canada took steps to ensure that our economy and monetary formula coped with the unprecedented surprise of the shutdown. We react in two main ways. First, we cut our policy interest rate to 0. 25%. Second, we buy bonds and other debt to help keep primary investment markets functioning.
Taken together, those moves aim to set the level for a strong recovery when pandemic restrictions are lifted. The shutdown is temporary, but restricting much of activity can have lasting effects if governments, businesses, and households don’t have access to mandatory funding. to help them. We are helping to ensure that this access is still available during the crisis.
We live in a time when businesses and families need credit, and the steps we are taking are aimed at ensuring that these credits remain available. So, we’re helping to get cash back into the hands of Canadians, and that’s a vital element to having a strong recovery once the economy is, regardless, in a position to reopen.
Lowering interest rates is the Bank’s most productive and well-known tool for inspiring lending and stimulating the economy. In general times, our policy rate is passed on to the economy by affecting rates on things like mortgages and savings accounts at banks. But those aren’t In these general times, there’s little our rate cuts can do to stimulate the economy, because the shutdown means there’s almost nowhere left to spend. Instead, cutting rates to close to 0 supports other segments of the credit market. This is helping to lower debt service prices. for many borrowers at a time when every dollar counts. This ensures that when recovery begins, you’ll have the most productive momentum imaginable.
Some wonder why rates can’t be cut to 0 or higher, all the way into negative territory, a policy that other central banks have implemented. Negative rates occur when central banks reduce their policy rates below 0 and rate interest on bank deposits (usually the other way around). We could opt for negative rates if we thought it was necessary. But zero or negative rates come at a cost: they can harm the functioning of primary investment markets. This is because investors would withdraw cash from short-term monetary assets. and hold other assets, such as cash, that do not have negative rates. This is especially true if banks pass those negative rates on to their depositors. This is the opposite of what we need to achieve at a time when the formula is already under enormous strain.
This brings us to the current component of the Bank’s work: the purchase of bonds and other debts from governments and corporations. Governments have increased spending for Canadians who have lost their jobs and income. Businesses and families have to borrow to pay their bills. and companies borrow primarily through the issuance of debt securities, such as bonds, treasury bills, advertising paper, and bank acceptances, which are then traded on money markets. Banks also use these markets to finance their lending to businesses and households.
Typically, there are enough buyers and traders in debt markets for governments, corporations and banks to release financing. But in times of monetary stress, institutions that trade in those markets, who prefer to hold money rather than debt securities, would possibly withdraw. If this happens, those markets may also prevent them from functioning properly, leading to a “credit crisis. ” To avoid this, one of our key functions is to ensure that there is sufficient liquidity or liquidity in the formula to allow transactions in the debt markets. By purchasing bonds and other debt, we have unlocked lines of investment, made those markets more efficient, and freed up liquidity that companies and governments can use to pay salaries and suppliers and provide emergency benefits to those in need.
Together, our rate discount and buyback systems have given borrowers more credit when they need it most. By helping debt markets serve better, we’ve put more cash in the hands of Canadians and helped ensure that lower interest rates get advantages for end borrowers. In this way, we have set the bar for a strong recovery when life in Canada returns to normal.
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