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Bank of Canada issues first statements on quantitative easing
Practical Law Legal Update 9-386-0667 (Approx. 2 pages)
Bank of Canada issues first statements on quantitative easing
by Stephen Redican and Rosalind Morrow, Borden Ladner Gervais LLP
| Published on 07 May 2009 • Canada |
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The Bank of Canada has outlined its monetary policy approach while the overnight interest rate is at its effective lower bound (0.25%). This new monetary policy framework allows for the possibility that additional stimulus could be provided through quantitative easing or credit easing.
The Bank of Canada announced on 23 April 2009 in its April 2009 Monetary Policy Report the outline of a framework that describes the Bank of Canada's monetary policy approach when the overnight interest rate is at its effective lower bound (0.25%). Mark Carney, the Governor of the Bank of Canada, reiterated this on 28 April 2009 in statements he made to the House of Commons Standing Committee on Finance.
This new monetary policy framework allows for the possibility that additional stimulus could be provided through either/both the "unconventional" methods of:
- Quantitative easing. This involves the creation of central bank reserves to purchase financial assets. It is effectively the electronic printing of money.
- Credit easing. This includes outright purchases of private sector assets in certain credit markets that are important to the functioning of the financial system but that are temporarily impaired. Credit easing does not need to be financed through the creation of central bank reserves and can, instead, be financed either by reducing holdings of other assets or by increasing government deposit liabilities.
In this connection, Mr Carney stated that as "these are uncertain times, and if additional stimulus were to become necessary, the Bank retains considerable flexibility in the conduct of monetary policy at low interest rates." Mr Carney stated that the framework was published because of the importance of outlining the available alternatives in a principled and transparent fashion. If the Bank of Canada were to deploy either quantitative easing or credit easing, Mr Carney has stated that it would act in a deliberate and principled fashion.
Mr Carney has made it clear that the focus of these alternatives, if implemented, would be to improve overall financial conditions to support demand and achieve the Bank of Canada's core inflation target. In this connection:
- Asset purchases would be concentrated in maturity ranges that would have the maximum impact on the economy.
- Actions would be taken in as broad and neutral a manner as possible.
- The Bank of Canada would act prudently, mitigating the risks to its balance sheet and managing its ultimate exit from such alternatives at a measured pace.
Will quantitative easing or credit easing be used?
Given the Bank of Canada's and Mr Carney's reported statements regarding the high level of confidence in the Bank of Canada's current policies, many commentators think that these alternatives probably will not be used unless some unforeseen economic shock takes place.