The Bank of Canada’s decision to end its pandemic-induced government bond purchases to stimulate the economy and earlier-than-expected rate hike warnings have tarnished the federal government’s efforts to develop a plan annual debt management.
According to the bank’s own estimates, its program lowered the rates of return on short-term government debt by 10 basis points, or one tenth of a percentage point.
It also likely made buyers think more about long-term bonds that lock in debt at today’s low interest rates.
The bank’s decision on Wednesday to end the program, known as quantitative easing, and forecast a rate hike sooner than expected, helped boost bond yields in the short and medium term.
As rates rise, so will the amount the government will have to pay, which one expert says could make the Liberals more cautious about deficit spending and the debt itself.
Rebekah Young, director of fiscal and provincial economics at Scotiabank, also said federal debt costs are expected to remain low by historical standards even as rates approach pre-pandemic levels, but this could change due to the unpredictability of the pandemic.
The Parliamentary Budget Officer previously estimated that a sudden one percentage point hike in rates could raise public debt charges by $ 4.5 billion, to $ 12.8 billion more after five years.
“I think that will change the language the government uses and that there will be a pivot this year,” Young said of the debt and the rate hike.
“Current interest rates will start to rise, so it would take less of a shock for these (debt) numbers to start looking less acceptable.”
In an interview with the Canadian Chamber of Commerce on Wednesday, Finance Minister Chrystia Freeland linked government finances to the decision to end pandemic aid for some workers and businesses.
“Your members… are people who think about the debt, who think about the deficit,” she said. “I want to tell you guys, me too. Please keep this in mind as you think about our (perks) announcement last week. “
The government consults annually on how to manage its debt, which now stands at $ 1.1 trillion. A document setting up the consultations this month hinted at the government’s interest in how to lock in more longer-term debt.
Young said the government has a limited window to capitalize on these low rates before a mountain of debt matures over the next two years, which will need to be refinanced at higher rates.
Sherry Cooper, chief economist at Dominion Lending Centers, notes that since September, yields on five-year federal bonds have jumped 75%.
After the bank’s announcement on Wednesday, short- and medium-term bond yields surged, but the end of interest rate hikes did not.
The Bank of Canada has also suggested that it could start increasing its key rate by 0.25% from the second quarter of 2022, three months earlier than expected.
BMO Chief Economist Douglas Porter expects the bank to hike rates every three months by a quarter of a percentage point from April, which would bring the target rate to one percent by the end of next year.
He expects that pace to continue until the end of 2023, bringing the rate back to pre-pandemic levels.
“Obviously, the risks are tilting towards an even earlier move, and – yes – the possibility of a faster cadence and a higher endpoint,” Porter wrote in a note Wednesday.
Jordan Press, The Canadian Press
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