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‘Old-school central banking’ can only do so much to help during coronavirus crisis

After the Bank of Canada cut interest rates by a half-point on March 4, I wrote that the timing of its next move would be determined by oil prices. If I had thought to check the central bank’s measure of commodity prices, I might have been less surprised by the second cut nine days later.The…

After the Bank of Canada cut interest rates by a half-point on March 4, I wrote that the timing of its next move would be determined by oil prices. If I had thought to check the central bank’s measure of commodity prices, I might have been less surprised by the second cut nine days later.

The commodity-price index plunged almost 13 per cent between March 4 and March 11, the biggest move in weekly data that date back to 1972. Oil was the main factor, with the energy sub-index collapsing 21 per cent. The numbers are hard to look at on a spreadsheet, never mind a balance sheet where the figures take on a whole different meaning. The average change from week to week is usually about 0.1 per cent.

“The economic consequences of the coronavirus itself will clearly have a major negative impact on the economy,” the Bank of Canada said on March 17 in a statement explaining the circumstances behind its emergency interest-rate cut four days earlier.

“Both the size and duration of this impact are unknown, but it was acknowledged that the effects should ultimately prove temporary,” the central bank continued. “The impacts of the drop in oil prices are much more quantifiable and potentially more long-lasting.”

The past few days rank among the most extraordinary in the Bank of Canada’s 85-year history. For instance, it used to say nothing about what went on at its policy meetings, but the statement on its latest deliberations was packed with context, including a timeline of the events that led to the half-point cut on March 13.

On that morning, Governor Stephen Poloz and Carolyn Wilkins, the senior deputy governor, attended a meeting with Bill Morneau, the finance minister, Paul Rochon, the deputy minister of finance, and Jeremy Rudin, the head of the federal banking regulator. Poloz and Wilkins revealed they intended to introduce a measure to support small-business lending. Morneau and Rudin also had announcements to make, and the finance minister “suggested” a joint announcement as a “powerful confidence-boosting statement.”

According to the central bank, the interest-rate cut wasn’t discussed. Later that day, Poloz assembled his deputies to weigh their options. Rather than wait, they decided to give an extra kick to the coordinated response that was already in the works. “After some discussion of the relative merits, Governing Council concluded that there could be considerable benefit to reducing interest rates immediately and significantly to complement the other measures supporting the functioning of credit markets,” the statement said.

It turned out Poloz and his deputies were only getting started. The stress in the real economy spread to the credit markets that prop it up with remarkable speed, and the sight of the government linking arms with the central bank and banking regulator at a press conference in Ottawa didn’t raise spirits as much as hoped.

There were only faint signs of stress in financial markets on March 11, when the Bank of Canada announced a couple of twists on its standard operations that appeared to be about staying ahead of potential issues.

Credit markets require a ready supply of cash and low-risk assets to serve as collateral. The Bank of Canada said it would help out and pledged to swap newer debt for older bonds that might prove harder to move during a period of high demand for premium assets. Officials also said they would begin conducting weekly, instead of biweekly, repurchase agreements with the biggest banks to ensure that lenders had access to a reliable source of cash in order to settle their accounts.

These programs were released in an orderly fashion and described as proactive initiatives: the main goal of the former was to “promote price discovery,” while the latter was characterized as an insurance measure. There were no signs of panic. That came the next day.

The evening hours of March 11 will be a key moment when the histories of the coronavirus crisis are written. U.S. President Donald Trump, out of nowhere, restricted travel from Europe. It was jarring not because it was necessarily wrong, but because the president to that point had been relatively nonchalant about COVID-19. Global markets freaked out and Canadian equities suffered their biggest crash since the Second World War. Volatility has raged ever since.

The interest-rate cut on March 13 got almost all the attention. But the central bank also went ahead with its plan to help smaller companies by announcing it will purchase one-month bankers’ acceptances issued by Canadian banks starting next week. It’s a novel initiative that Poloz described as “no small deal.” Bankers’ acceptances are widely used by smaller firms, and lenders should be less reluctant to issue them if they know the Bank of Canada will be waiting to take the risk off their hands.

“We want people to understand that we’re on the job and we’re going to stabilize the economy,” Poloz said.

That job has been unrelenting. After the U.S. Federal Reserve’s blitzkrieg of monetary stimulus Sunday evening failed to calm financial markets, the Bank of Canada rushed back to the front lines on March 16.

At noon Ottawa time, the central bank said it “stands ready” to buy mortgage-backed securities. Four hours later, it said it would purchase up to $500-million worth of such securities “for as long as market conditions warrant.” That market — which circulates assets worth some $245 billion — is a pillar of the financial system because banks rely on it to reduce their exposure to mortgage risk and as a deep pool of cash. Canada Mortgage and Housing Corp. joined this front by announcing it would purchase up to $50 billion in insured mortgages, hauling out a weapon last used in the financial crisis.

Finally, the Bank of Canada said it would loosen some requirements to ensure the biggest financial institutions that support the payments system had easier access to the central bank’s cash reserves.

“For those of you unfamiliar with the responses from the (financial) crisis, this is old-school central banking that has teeth,” said Ian Pollick, head of North American rates strategy at CIBC World Markets.

Let’s hope. So far, the Bank of Canada is fighting the economic dimension of this new crisis mostly alone. Morneau promised to follow Poloz’s rate cut with a major confidence boost of his own. As of late afternoon on March 17, he had still done nothing.d

•Email: kcarmichael@postmedia.com | CarmichaelKevin

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