How quantitative easing works

Deputy Governor Paul Beaudry explains the Bank’s quantitative easing program and its role in the economic recovery. He also discusses the Bank’s decision yesterday to leave the policy rate unchanged.

Watch Deputy Governor Beaudry speak to business groups in New Brunswick via webcast. Read the full speech.

Policy rate unchanged

We decided to leave the policy interest rate at 0.25 percent.

Quantitative easing lowers the cost of borrowing

Since the COVID‑19 pandemic hit Canada in March, the Bank of Canada has taken several steps to help households and businesses get through the crisis and to support a solid economic recovery.

Cutting our policy interest rate to a low of 0.25 percent and holding it there has reduced short-term borrowing costs for households and businesses.

But when the policy rate is this low, we need to dig deeper into our tool kit to also influence the longer-term interest rates that matter to Canadians. One tool for this is quantitative easing—QE for short.

In a nutshell, our QE program involves buying large amounts of bonds that the Government of Canada has issued and sold to financial institutions, such as commercial banks.

  • Buying large amounts of Government of Canada bonds bids up their price.
  • This lowers their return, or interest rate.
  • A lower interest rate on Government of Canada bonds affects other key longer-term interest rates, such as mortgages and business loans.
  • This encourages borrowing and spending in the economy, which helps move the economy back toward full capacity—in other words, its healthiest state.

The Bank’s primary monetary policy goal is to achieve our 2 percent inflation target on a sustainable basis. To do that, we strive to keep the economy’s production as close to capacity as possible.”

Three misconceptions about quantitative easing

First, the Bank is not printing bank notes to buy government bonds.

To pay for the bonds, we issue a unique type of liability to match up with the new assets (i.e., the bonds) on our balance sheet. These are called settlement balances, and we pay interest on them, just like commercial banks pay interest on deposits at their institutions. So, QE expands our balance sheet but not the amount of cash in circulation.

Second, QE doesn’t mean that we are financing government spending and debt at no cost.

With QE, we are simply lowering the cost of borrowing for the government—just as we are for households and businesses. The government will have to repay the bonds that we buy through our QE program when they are due.

Third, using QE doesn’t risk sparking high inflation.

A key reason we are using QE is that we currently face the opposite problem—low inflation.

Once inflation is back at our 2 percent target, we have the tools we need to keep it in check. And Canadians expect that inflation will stay around 2 percent, which also helps to keep it on target. Most important, the way we approach our QE program—including when and how we scale it back—will always be tied to the outlook for inflation.

Our quantitative easing program today

Overall, we have purchased a little more than $180 billion in Government of Canada bonds since we launched QE in March.

But, as a share of our economy, the value of assets that we hold is still relatively low.

We are currently buying at least $4 billion a week of bonds, down from $5 billion a week at the start of the program. And we have adjusted our purchases to focus on longer-term bonds so that we can have the most impact on borrowing costs for households and businesses.

Our QE program is grounded in the same policy framework that has served Canada well for years. We will use QE for only as long as it takes to bring inflation back up to 2 percent in a durable way.

The exit strategy for our QE program is tied to our inflation goals. We will pursue quantitative easing until our economic recovery is well underway.”

Watch Deputy Governor Beaudry answer questions from the media following his speech.

Our decision yesterday

As noted earlier, we decided to keep the policy interest rate at 0.25 percent. And we restated our commitment to keep it there until the inflation target is sustainably achieved. We also decided to maintain the pace of at least $4 billion in weekly asset purchases in our QE program.

As expected, the sharp rebound in the economy appears to be giving way to a longer, slower phase of the recovery.

Going forward, the second wave of COVID‑19 cases could worsen and hamper the economic recovery, while the distribution of vaccines could lead to a faster rebound.

The Bank has the tools to respond either way.

Whatever the outcome, the Bank remains committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

Read the full speech—or, see our follow-up explainer on quantitative easing.