End quantitative easing colors federal debt efforts

OTTAWA –

The Bank of Canada’s move to end its pandemic-driven purchases of government bonds to stimulate the economy, and warnings of rising interest rates faster than previously expected, have colored federal efforts to draw up an annual debt management plan.

According to the bank’s own estimates, its program of short-term government debt fell by 10 basis points or one tenth of a percentage point.

It probably also made buyers think more about long-term bonds that lock in debt at today’s low interest rates.

Wednesday’s move by the bank to end the program, known as quantitative easing, and anticipate a rate hike faster than expected, helped push up short- and medium-term bond yields.

As rates rise, so will the amount the government has to pay, which an expert suggests could make the Liberal Party more cautious about deficit spending and the debt itself.

Rebekah Young, Scotiabank’s director of finance and provincial economics, also says that federal debt costs should remain low by historical standards, even as rates approach pre-pandemic levels, but that may change due to the unpredictability of the pandemic.

The parliamentary budget official has previously estimated that a sudden increase of one percentage point in rates could increase public debt taxes by $ 4.5 billion and grow to $ 12.8 billion more after five years.

“I think it will change the language the government uses and there will be a turning point this year,” Young said of the debt and rising interest rates.

“Current interest rates will start to rise, and so it would take less of a shock to make these (debt) figures start to look less tasty.”

In a conversation with the Canadian Chamber of Commerce on Wednesday, Finance Minister Chrystia Freeland linked state finances with the decision to stop pandemic assistance to some workers and businesses.

“Your members ΓǪ are people who think about the debt, who think about the deficit,” she said. “I want to tell you, I do too. Remember that when you think of our (benefits) announcement last week.”

The government annually consults on how to manage its $ 1.1 trillion debt. A document establishing the consultations this month hinted at the government’s interest in how to lock in more debt in the long run.

Young said there is a limited window for the government to take advantage of these low interest rates before a mountain of debt matures over the next two fiscal years, which need to be refinanced at higher interest rates.

Sherry Cooper, chief economist at the Dominion Lending Centers, notes that since September, the yield on the federal government’s five-year bond has risen 75 percent.

Following the bank’s announcement on Wednesday, interest rates on short- and medium-term bonds rose, but not the end of interest rate hikes.

The Bank of Canada also suggested that it could start raising its key interest rate from 0.25 percent starting in the second quarter of 2022, three months earlier than previously expected.

BMO chief economist Douglas Porter expects the bank to raise interest rates every three months by a quarter of a percentage point as early as April, which will bring the target rate up to one percent by the end of next year.

He expects the pace to continue until the end of 2023, bringing the course back in line with pre-pandemic levels.

“Clearly, risks are tilted to an even earlier move, and – yes – the possibility of a faster cadence and a higher endpoint,” Porter wrote in a note Wednesday.

This report from The Canadian Press was first published on October 31, 2021.

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