Supporting markets in tough times

Deputy Governor Toni Gravelle talks about actions the Bank of Canada took to make sure financial markets could work smoothly during the COVID-19 pandemic. He also discusses the Bank’s plans to discontinue some programs.

Watch Deputy Governor Toni Gravelle speak to the CFA Society Toronto via webcast. Read the full speech.

Lender of last resort

Acting as the lender of last resort for the Canadian financial system is an important role the Bank of Canada plays. It’s our responsibility to support banks and financial markets during times of crisis so that households, businesses and governments can access credit.

When COVID-19 hit, there was tremendous uncertainty in financial markets. Markets froze because:

  • most people wanted to sell assets
  • few people wanted to buy assets

In response, we quickly put in place several programs to inject temporary cash into the financial system. This helped keep markets liquid and functioning smoothly. As a result of these programs, our balance sheet grew to about $575 billion, more than four times its size before the pandemic.

An essential part of markets working well is liquidity: the ability to buy, sell, lend or borrow with relative ease. Think of it as the grease that keeps markets lubricated.”

With great power comes great responsibility

When we act as lender of last resort, we must guard against moral hazard—unnecessary risk-taking by those who believe they will be protected from the consequences.

When we help financial markets and institutions in times of crisis, we must do it in a way that doesn’t encourage market participants to engage in excessively risky behaviour once things return to normal. So it’s important to dial back the programs and tools that we use to support the economy once they’re no longer needed.

That’s why we started adjusting our programs last autumn as conditions improved.

Some of the shorter-term debt we purchased has already matured and no longer appears on our balance sheet. As a result, we expect our balance sheet to decline to about $475 billion by the end of April. And over the spring, we will suspend or discontinue a number of the programs that we put in place to support markets during the crisis.

Adjusting our quantitative easing program

Most of our balance sheet is made up of Government of Canada bonds. When interest rates are at their lowest and we use large-scale purchases of these assets to support economic activity, this is called quantitative easing, or QE.

When we buy large quantities of government bonds, it helps:

  • lower their rate of return
  • keep other interest rates—such as those for loans and mortgages—low, so people and businesses continue spending and investing
  • bring inflation back to our 2 percent target

Since starting QE, we’ve kept a close eye on economic activity and the state of the recovery. As the economy strengthens, we intend to gradually adjust the pace of our bond purchases. We will eventually reach a pace of bond purchases that maintains—but no longer increases—the amount of stimulus being provided to the economy.

We would be easing our foot off the accelerator, not hitting the brakes.”