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Reviewing our pandemic actions

Deputy Governor Sharon Kozicki talks about the importance of central bank transparency and accountability. She looks at the exceptional monetary policy measures the Bank of Canada used during the COVID-19 pandemic and analyzes their effectiveness.

Watch Deputy Governor Kozicki speak to the Canadian Association for Business Economics. Read the full speech.

We dug deep into our tool box

In March 2020, the world faced an unimaginable health and economic crisis. Economies shut down and financial markets spiralled. Fearing another Great Depression, governments and central banks around the world took quick and decisive actions.

The Bank cut the policy interest rate to 0.25%. This is the effective lower bound—the lowest level the interest rate can be before the Bank has to use other, less conventional monetary policy tools. We also made use of emergency liquidity programs and facilities to restore market functioning.

By the summer of 2020, markets were functioning, but the economy was in deep decline. Households and businesses were suffering and inflation was below target. The Bank turned to our extended monetary policy tool kit to provide more stimulus. We used two tools in particular:

  • Quantitative easing (QE)—With QE, a central bank buys many more government bonds than usual. Because more bonds are being bought, the price of those bonds goes up and the returns (or yields) of those bonds go down. This lowers the longer-term interest rates that matter to households and businesses, who can then borrow and spend more, supporting the economy.
  • Extraordinary forward guidance—With this tool, a central bank signals that interest rates will remain low until certain economic conditions are met. This also helps bring borrowing costs down.

By lowering borrowing costs, both QE and extraordinary forward guidance encourage spending and reduce the risk that inflation will fall short of the 2% target.”

Our actions worked

Before the pandemic, the Bank had never done QE and had used forward guidance only once. Coming out of the crisis, Canadians have asked us: did they work?

Bank staff have researched how effective these tools were in the pandemic. This research shows that QE and extraordinary forward guidance helped lower longer-term interest rates, which made borrowing cheaper for households and businesses. Monetary and fiscal policy responses, along with the rapid rollout of vaccines, helped the Canadian economy recover relatively quickly from the COVID-19 crisis.

The economic recovery meant QE was no longer needed. In October 2021, we became the first major central bank to end our QE program. We began the next phase in April 2022: quantitative tightening (QT), where we allow bonds to mature and roll off our balance sheet. We expect to complete QT sometime in 2025.

Why has QT been so smooth in Canada? I like to think it’s because we have been transparent.”

We will continue to build trust

The Bank is committed to being open and transparent—vital building blocks for maintaining Canadians’ trust. This is even more important during times of great uncertainty, like the COVID-19 pandemic.

When we didn’t have all the answers, we said so. When we made monetary policy decisions, we explained them. And when we faced challenges or saw progress in bringing inflation back to target, we communicated this in real time.

Higher interest rates have worked. Inflation is getting closer to our 2% target and underlying price pressures are easing. We are continuing to review the exceptional actions we took during the pandemic and will share our findings with Canadians.

Our focus now is on the lessons we can take from our pandemic experience and how those lessons will guide the future application of monetary policy.”

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