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Bank of Canada’s Massive Response to the COVID-19 Pandemic

Posted: Monday, November 2nd, 2020

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Central banks responded massively to the COVDI-19 pandemic, and the Bank of Canada followed its peers. The response to the health crisis helped manage the economic impact to the detriment of an increase in the central bank’s balance sheet.

Last week the Bank of Canada left the rates unchanged. The decision triggered a weakness for the Canadian dollar across the dashboard. However, the main reason why the Canadian currency declined may have come from an unexpected source – the weak crude oil price.

The price of oil plays a key role in the Canadian economy. An energy-intensive economy, the oil sector employs a lot of people and contributes substantially to the Canadian GDP. As such, the Bank of Canada always considers the oil market developments before delivering its monetary policy.

Bank of Canada

Bank of Canada Balance Sheet Expands Aggressively

As a response to the COVID-19 pandemic and the decline in oil prices, the Bank of Canada reacted in two ways. First, it lowered the interest rate close to the zero level. In fact, all developed nations’ central banks did a similar thing.

Second, it embarked on various quantitative easing programs, with the intention of supporting key financial markets in Canada. As a result, the central bank’s balance sheet expanded exponentially. So aggressive was the bond-buying scale ran by the Bank of Canada that it surpassed the Reserve Bank of Australia’s response to the COVDI-19 pandemic. Also, it reached the Bank of England pre-crisis balance sheet level.

Government of Canada Bond Purchase Program

Also dubbed GBPP, this program supports market functioning. Additionally, it provides market stimulus as the central bank buys government bonds in the secondary market. As the economy recovers and the output grows while unemployment falls, the central bank shifted the focus from the GBPP to other ways of stimulating the economy.

Corporate Bond Purchase Program

The central bank also buys corporate bonds with the intention to ease the strains in the Canadian dollar-denominated bond market. Also, the program helps to successfully pass-through the monetary policy decisions and actions to borrows.

These two programs are only some of the bond-buying operations initiated by the Bank of Canada in response to the coronavirus pandemic. It also buys commercial paper, provincial bonds, provincial money market securities, and bankers’ acceptances as well.

All in all, the aggressiveness of the Bank of Canada’s balance sheet expansion was not enough to spur a weaker Canadian dollar. If we look at the price action in the last months, we might say that just the opposite happened.

Therefore, a bigger driver for the Canadian dollar’s volatility is the price of oil. Unless the Bank of Canada decides to bring the balance sheet expansion to a whole new dimension, expect the changes in the price of oil to continue to dominate the CAD’s value.

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