Bank of Canada Governor Mark Carney yesterday said purchases of non-government assets may be an option as the bank looks at policies beyond interest rate moves. In a separate interview, Finance Minister Jim Flaherty said he’s studying more efforts to shore up the commercial paper market.
“We have lots of options to look at,” Flaherty said in Horsham, England, on the sidelines of a meeting of finance ministers and central bankers from the Group of 20 “The key here is we’ll do what is necessary in order to make the markets function well in Canada.”
Canada’s economy shrank at a 3.4 percent annual pace in the fourth quarter, the most since 1991. Reports have also shown record job losses and trade deficits in recent months.
Carney signaled he’ll likely revise down his outlook for the world’s eighth-largest economy next month. The Bank of Canada’s forecast for 3.8 percent growth in 2010 is more than twice the pace predicted by the IMF.
“When we laid out the projections in the update in January, we also laid out some upside and downside risks,” Carney said in the interview. “It’s safe to say the downside risks, particularly around the outturn in the global economy, have materialized.”
Beyond Rates
Carney said purchasing non-government assets is an option the central bank may consider. Earlier this month the Bank of Canada cut its benchmark lending rate to a record low 0.5 percent, and said it is preparing to use policies beyond interest rate moves, if needed, to revive an economy hit by a recession and tight credit markets.
“As we bring out the framework, it will be consistent that the bank is managing credit easing or has a framework for managing credit easing and we’ll decide when and if to use it,” he said.
Credit conditions for corporations have tightened, with companies facing the worst prospects for obtaining loans or making new sales in a decade, according to a survey of executives by the Bank of Canada released Jan. 12.
Purchases of securities may help drive down longer-term interest rates, stimulating borrowing and economic growth.
Extraordinary Measures
Canadian policy makers left the door open for extraordinary measures earlier this month. The Bank of Canada said at its March 3 interest rate announcement that it will outline how it would implement such measures on April 23.
Fed Chairman Ben S. Bernanke has increased the central bank’s total assets by $1 trillion over the past year to revive the economy and stem the risk of deflation. In December, the Fed switched to using emergency credit programs as the main tool of monetary policy. The Bank of England this month began to acquire government bonds with newly created money.
So-called quantitative easing is designed to leave banks with so much cash that they stop hoarding and expand lending. It can involve a central bank buying securities and creating money to pay for them. A central bank can also try buying up securities to drive down longer-term interest rates, extending efforts to keep short-term rates low with benchmark rates.
Buying Assets
In Canada, the federal government has taken the lead in purchasing assets from the financial system in a bid to revive lending, including facilities to acquire as much as C$125 billion in mortgages from banks and C$12 billion in car loans and leases.
Carney said it’s logical for the government to purchase the mortgages through the state-owned Canada Mortgage and Housing Corp., rather than the central bank, because the agency already insured the assets. Still, the central bank has “providence” over “credit easing,” he said.
“It makes sense to run that through CMHC,” Carney said. “In terms of other potential measures, we’ll work with the government to decide how to design them.”
Flaherty said the finance department and the central bank are coordinating efforts.
“We both have a role. The key here is that the framework is a framework that matches what the bank can do with what the government can do,” Flaherty said. “I have regular discussions with the governor of the bank to make sure we don’t go off course, that what he proposes to do meshes with what the government is doing.”
