Monetary Policy - Op Eds

The Bank of Canada’s rate announcement last week — no change — was no surprise. But the effects of its asset purchases could be. The Bank had already lowered the target rate to its effective lower bound of 0.25 per cent, so a further cut was not expected. The Bank didn’t say so but the rate may stay where it is for a while.

The Bank did discuss expansions to quantitative easing (QE), however. How QE will play out for monetary policy, and especially the inflation target, is cause for concern. In its Monetary Policy Report and subsequent press conference, the Bank emphasized that its actions to date have been oriented towards supporting the smooth functioning of financial and credit markets. A focus on financial stability at a time…

Since the COVID-19 crisis began, yield spreads for provincial 10-year bonds over equivalent federal debt have increased by about 100 basis points across all provinces. Some provinces — Newfoundland, for example — are in even worse shape. To ease funding pressures on the governments that are on the front line in health care and social assistance we need a two-pronged approach in which the Bank of Canada addresses disruption in the debt markets, and an overhauled federal fiscal backstop helps provinces still in need.

The Bank of Canada is already providing liquidity to the provinces by purchasing short-term provincial debt, thus helping alleviate rollover concerns. It has also embarked on a large-scale asset purchase program —…

The Bank of Canada was right to cut interest rates last week but it may have been wiser to reduce them by only 25 basis points rather than 50 and thus keep more firepower in reserve in case it’s needed in coming weeks.

The Bank likely was leaning heavily towards an interest rate cut even before the Fed’s unscheduled and surprising 50 basis point federal funds rate cut last Tuesday. That might have given the Bank the final nudge to follow suit in its regularly scheduled rate decision a day later. Given the complexity of COVID-19, a cut of at least 25 basis points was likely the right call. The key was to move swiftly and decisively, which the Bank did. The only uncertainty was whether it would take as drastic a step as the Fed. In…

Over the past 25 years, Canadians’ household debt has increased steadily as a share of their disposable income. During this time, and especially since the financial crisis, they have often been told their debt levels were unsustainable and that a day of reckoning was fast approaching. And yet that day has not come. One reason why seems clear: for the most part over the past 25 years, the amount Canadians spend servicing their debt has not changed as a percentage of their disposable income.

In a recent C.D. Howe Commentary, we argue that it is primarily this “debt service ratio” (interest payments plus reimbursement of principal divided by disposable income) that determines households’ ability to make their payments at…

In Canada the financial services sector weathered the 2007-08 global “credit crunch” better than it did in many other developed countries. One argument for why, certainly in contrast to the U.S., was the smaller size of our “non-bank financial intermediation” (NBFI) sector, more commonly referred to as “shadow banking.” But rapid growth in the shadow sector since the crisis suggests this resilience might be under threat. What does that mean for monetary policy, financial stability and regulation? As it turns out, a lot.

Broadly speaking, the shadow sector includes investment funds, private lenders like mortgage finance companies, companies that offer private-label securitization like asset-backed securities, and more. Shadow…