🍁 The Bank of Canada & Government Relief Programs

The Bank of Canada stated today:"The bar for using quantitative easing (QE) should remain very high going forward."This means that if the government runs a large deficit to fund COVID-style relief for potential 25% U.S. tariffs, without QE, bond yields will rise significantly, increasing interest costs for taxpayers.

📌 Key Definitions:

• 🔹 Quantitative Easing (QE): The central bank buys government bonds to inject liquidity, lower interest rates, and encourage borrowing.
• 🔹 Quantitative Tightening (QT): The central bank sells or stops reinvesting bonds, reducing liquidity and increasing interest rates to control inflation.

📢 Bank of Canada (BoC) Announcements:

The BoC confirmed it will end QT in less than two months and emphasized:"We are a long way from needing quantitative easing. Our policy rate is at 3%. We recently published a review of extraordinary measures used during COVID. What we concluded was that the bar for using quantitative easing in Canada has always been very high. In fact, we have only used it once—during a once-in-a-century pandemic. The bar for using quantitative easing should remain very high going forward."

📉 Government Response to 25% U.S. Tariffs:

Several government officials have suggested pandemic-style relief programs to offset potential tariffs. However, BoC is unlikely to support fiscal stimulus through QE this time due to:

• ✅ The $130B gap in the size of its balance sheet from the pre-pandemic baseline.
• ✅ A weakening CAD, which could fuel import-driven inflation.
• ✅ The need to restore monetary stability post-COVID.

This means funding large relief programs will be much harder than before.

💰 Impact on Government Bonds:

• ✅ In pandemic relief programs, the government issued bonds, and the BoC was a key buyer, helping to keep yields low.
• ✅ Without QE, the government may struggle to sell bonds, forcing it to offer higher yields to attract investors.
• ✅ Higher yields = More interest costs for taxpayers.

⏳ In Short:

If the government implements COVID-like relief programs without BoC support, it will likely face significantly higher interest costs on newly issued bonds. However, it's important to note that predicting the BoC’s response this time remains uncertain.