Canada’s central bank is curtailing several of its crisis-fighting liquidity facilities as the nation's economy shows signs of bouncing back, despite a possible second wave of coronavirus cases lurking on the horizon.
Effective Oct. 26, the Bank of Canada will discontinue its Bankers’ Acceptance Purchase Facility, which was introduced in March and facilitates funding for small and medium-sized corporate borrowers, the bank said Thursday.
On the same day, the central bank will end its Canada Mortgage Bond Purchase Program, which saw the central bank inject liquidity into the financial system by gobbling up billions of dollars in mortgages and mortgage-backed securities.
The bank will also reduce the frequency of its term repo operations, in which the central bank provides collateralized loans to primary dealers, from once per week to once every two weeks starting on Oct. 21.
The eligible securities for regular term repo operations will now include only Canadian dollar-denominated marketable securities. Own-name covered bonds, own-name Term asset-backed securities and own-name asset-backed commercial paper are no longer eligible.
The moves mark a significant policy shift and a sign of optimism from the Bank of Canada, which has taken drastic steps to reduce economic damage from the coronavirus pandemic and related shutdowns.
The central bank has held its benchmark overnight interest rate at a record low of 0.25% since March, and has purchased billions of dollars worth of assets in order to keep markets functioning even as the country’s GDP fell 13% year-over-year in the second quarter.
But the bank has scaled back its purchases over the past few months, with holdings under the three programs falling from CAD 220 billion ($166 billion) in June to CAD 170 billion ($129 billion) currently, according to Bloomberg data.
When disclosing its decision to keep rates at record lows in September, the Bank of Canada warned, “The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.”
Thursday’s decision shows the central bank believes the Canadian financial system can weather the second wave of coronavirus cases, even if the overall economy takes a hit.
“Overall financial market conditions continue to improve in Canada,” the Bank of Canada said.
However, the central bank also said it maintains the option of restarting any of the soon-to-be discontinued liquidity facilities if it sees fit.
--Additional reporting by Carrie Wood