No one expects the Bank of Canada to move rates later this week — or anytime soon for that matter — but National Bank Financial (NBF) would like the central bank to start paring back its quantitative easing efforts.
In a research note, NBF said the bank’s policy rate is expected to remain at its rock-bottom level of 0.25% at its rate decision on Wednesday, and likely until 2023 at least.
So, while the rate decision “is not in doubt,” NBF said there should be greater debate about the path for quantitative easing (QE) via the Government of Canada Bond Purchase Program.
To that end, NBF believes the central bank is “overdoing it on QE.”
“The bank’s program is proportionately much larger than what the Fed is doing, relative to the size of the economy, population or the deficit,” the report said. “Most striking of all, the BoC’s current QE program is almost six times larger than the Fed when scaled to outstanding bonds.”
Before the pandemic hit, the Bank of Canada owned less than 15% of outstanding federal government bonds, NBF said. Thanks to its QE program, the bank will own around 40% of outstanding federal bonds by the end of 2020 and could be closer to 50% at this time next year, the report suggested.
“Heavy and unrelenting BoC bond buying has already resulted in market distortions, including a noted erosion in secondary market liquidity down the curve… the place where liquidity is perhaps most vital. Barring operational changes, this market dysfunctionality will get worse,” it said.
NBF argued that the central bank should look to pare back the pace of buying to bring it more in line with the Fed’s level.
“If markets are telling us anything, it’s that buying C$5 billion/week of outstanding [federal government] bonds takes too much product out of the market,” it said.
“A sensible solution would see the BoC slow the pace of buying mostly down the curve, making less of an adjustment five years and out,” it suggested.