BOC gets into quantitative easing

The foam is finally on the runway.

For at least a week, and probably longer, the entrepreneurs, executives and investors who make Canada’s economy run had been hurtling toward a crash with a terrible feeling that they were in the coronavirus crisis alone.

There was lots of talk in Ottawa about doing “whatever it takes” to prevent a repeat of the Great Recession, but that appeared to mean less in Canada than in other places. At the start of the week, the Bank of Canada’s benchmark interest rate was 0.75 per cent; very low, but not as low as almost everywhere else. Prime Minister Justin Trudeau’s government had promised to cover 10 per cent of the wages of smaller companies for a few months, which was a nice gesture, but chintzy compared with what countries such as the United Kingdom and Germany were doing.

One executive, who survived the financial crisis, told me a couple of weeks ago that he had never been more anxious. He had run all the scenarios and couldn’t figure out a way to avoid firing all or most of his staff.

That executive will still be facing tough choices in the days ahead, but they may no longer be quite as drastic. That’s because Ottawa’s response to the COVID-19 recession finally caught up with the rest of the world on March 27.

The Bank of Canada cut its benchmark interest rate to effectively zero, while pledging for the first time to create tens of billions of dollars to buy bonds, an approach to monetary policy called quantitative easing, or QE.

And Trudeau stepped up with a promise to increase the wage subsidy to 75 per cent.

He also introduced a number of low-interest bridge loans, and told companies they could defer paying taxes and duties until the summer. The newest fiscal programs followed a promise earlier this week to send $2,000 per month to Canadians who lose their jobs because of COVID-19 shutdowns for up to four months.

“Thank God the Feds listened to our pleading,” tweeted John Ruffolo, vice-chair of the Council of Canadian Innovators, an assembly of fast-growing companies such as Lightspeed POS Inc. and Wattpad. The new suite of temporary aid “is hopefully the right medicine to save many small and medium-sized businesses,” he said.

Forecasters have been releasing progressively dire outlooks. Earlier this week, the International Monetary Fund said the world is facing an economic contraction “at least” as severe as the one that followed the financial crisis in 2008. In Canada, the Office

of the Parliamentary Budget Officer on Friday said gross domestic product could collapse by 25 per cent in the second quarter, and contract by about five per cent in 2020 from the previous year, which would be the biggest decline since 1962.

Stephen Poloz, Bank of Canada Governor, avoided arithmetical descriptions of the recession.

“What matters is what’s going on under the surface,” Poloz said at a news conference on Friday alongside Bill Morneau, the finance minister. “If we manage to buffer consumer confidence and business confidence, and I think we will if the policies work as intended, I think we’ll maintain those linkages between companies and their employees, and that means we’ll have a very robust return to where we were. We will have limited or possibly avoided permanent damage to the economy.”

Royal Bank of Canada earlier this week said the federal deficit would have to balloon to 10 per cent of gross domestic product to match what other countries are doing to fight the coronavirus crisis. Trudeau and Morneau now seem well on their way to hitting that mark.

Morneau said he’s close to completing specific packages for the industries that have been pushed to the brink, particularly oil and air transportation. No matter what’s in the fine print, the top-line cost of coming to the aid of big companies such as Suncor Energy Inc. and Air Canada will be expensive.

In the absence of industry bailouts, the Bank of Canada once again stole the show.

The benchmark interest rate is now 0.25 per cent, matching the lowest ever, which is also the lowest the central bank thinks the rate can go without disrupting the proper functioning of financial markets.

At the start of the month, the policy rate was 1.75 per cent.

Never has Canada’s central bank reduced borrowing costs so quickly.

Nor has it ever sought to compress interest rates through quantitative easing. That precedent, too, is about to change.

Along with the interest-rate cut, the central bank said it will begin buying at least $5 billion worth of government bonds per week until the economy turns around. It will also purchase commercial paper starting next week, but it hasn’t yet settled on an amount. The idea is to flood fear out of credit markets by pumping them full of cash.

“There’s an incredible amount of uncertainty in the market,” said Darcy Briggs, a fixed-income portfolio manager at Franklin Bissett Investment Management in Calgary. “Credit isn’t flowing.”

Briggs said the Bank of Canada was lagging its peers, but the new measures should help it catch up. Laggard or not, the central bank is firmly in the fight now.

“We’re doing a tremendous amount,” Poloz said.

“A firefighter has never been criticized for using too much water.”