Beyond the widely expected decision to leave its key policy rate at 0.25%, the Bank of Canada (BoC) announced additional measures that we believe will support financial markets.
Within a month, the BoC brought its overnight rate target down 1.5% (end of March). To ensure that financial markets continue to function properly, the Bank also injected nearly $200 billion into the economy in the form of asset purchases and bank lending operations to restore liquidity.
To curb the spread of the COVID-19 pandemic, governments across the globe have virtually shut down parts of their economies, disrupting both financial markets and economic growth. In Canada, this has translated into a 9% plunge in GDP in March alone, according to a Statistics Canada estimate.
Additional support measures target provinces and corporations
Maintaining the government bond purchase program
The BoC will continue to buy government bonds to the tune of at least $5 billion a week, a program which started April 1st. While the program is still relatively new, we are seeing signs that it has helped markets. In fact, the central bank’s second in command, Carolyn Wilkins, said Wednesday that financial strains have diminished compared to 3 weeks ago. The Bank confirmed it will increase the level of purchases as required to maintain a properly functioning government bond market.
Increasing Treasury Bills purchases at auctions
The Bank is also temporarily increasing the amount of Treasury Bills it acquires at auctions to up to 40%. We believe this additional support measure will be beneficial to markets.
Provincial and corporate bond purchases
The BoC also introduced a $50 billion Provincial Bond Purchase Program and a $10 billion Corporate Bond Purchase Program. The former is a welcomed addition to the Money Market Purchase Program that has been effective in normalizing shorter term yields. The latter will be aimed at higher quality corporate bonds in the secondary market. Trading in lower quality auto and energy companies remains volatile and we will monitor the impact of the Corporate Bond Purchase Program on these two battered areas of the market.
Uncertain outlook depends on the duration of COVID-19 containment measures
With Canada’s economic woes amplified by lower oil prices, “estimates suggest that the near-term downturn will be the sharpest on record,” the central bank said. Compared to the fourth quarter of 2019, Canadian growth will contract by 1-3% in the first quarter of 2020.1 For the second quarter, the Bank estimates that we could see activity drop 15-30% from fourth quarter 2019 levels.1 On Tuesday, the International Monetary Fund projected that Canada would fare worse than most developed economies with GDP estimated to decline 6.2% in 2020.2
The BoC recognizes that it will be near impossible to maintain its 2% inflation target against this backdrop and expects the inflation rate to be close to 0% in the current quarter.
What it means for your portfolio
We had anticipated stronger supportive language from the Bank today, which reminded us that the Bank “stands ready to adjust the scale or duration of its programs if necessary.” It added that its actions were “aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.” The tone reflects the BoC’s high level of uncertainty and is not overly reassuring.
Given that we were already positioned for today’s outcome, we do not anticipate any changes to our generally defensive posture and use of government T-Bills for a large portion of our cash allocations. For more information, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
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