Bank of Canada’s Response to the Pandemic

Bank of Canada’s Response to the Pandemic


Executive Summary. 3

Thesis Statement 4

Introduction/Background. 4

Literature Review.. 5

Analysis. 8

Summary/Conclusion. 12

References. 14

Executive Summary

Much has been written about the ongoing COVID-19 pandemic and how it is affecting households, businesses, and economies as a whole. The pandemic has had huge impacts on economic activity and stability in all countries. Realizing that the pandemic may take very long to contain, governments the world over have had to devise strategies of ensuring that life goes amid the new normal. In Canada, the federal government shares this responsibility with the country’s central bank: the Bank of Canada. In fulfilment of its safeguarding economic welfare, the Bank of Canada (referred to in this report as the Bank) has implemented colossal stimulus programs that are aimed at promoting economic activity. These programs are broadly referred to as quantitative easing. Specifically, the Bank has lowered interest rates to make loans easier to access by individuals together with small businesses. Duration of loan repayment has also been extended. A number of liquidity facilities (most of which have since been suspended) were also established with the objective of empowering financial institutions to lend to borrowers. Additionally, the Bank has embarked on massive purchase of corporate and government bonds so as to stimulate investment. All these measures are, to an extent, helpful in boosting the economy. Specifically, the programs help financial institutions to provide affordable loans to businesses and households.

Although the Bank’s motive is to boost wealth, its quantitative easing approach is considered ineffective in helping restore Canada’s economy. To begin with, most of the Bank’s programs have the potential of widening economic inequality in the country. They only benefit the wealthy asset owners, making the poor even poorer. It also hampers neutrality within financial markets. Moreover, the effects of these programs are indeterminate in that beyond certain levels, lowering interest rates may not generate substantial economic benefits. In view of these shortcomings, it is recommended that the Bank of Canada ought to review its response to the pandemic.

Thesis Statement

In response to the COVID-19 pandemic, the Bank of Canada has designed and implementing massive programs aimed at stimulating economic growth, but these measures are neither effective nor sustainable in the long-term.


The health threats posed by the coronavirus disease have necessitated strict measures aimed at preventing the virus from spreading to uncontrollable levels. Much as these measures are necessary, they have had serious economic impacts globally. In Canada, for example, every sector, ranging from travel to energy, has been hard hit by the containment measures (Wilkins, 2020). The country’s gross domestic product plunged by significant margins in 2020 as a result of lost output. As the government gradually lifted the containment measures, extraordinary actions have been at the various levels of government in Canada. These actions are geared towards fostering economic recovery, with specific objectives being to limit hardship while at the same time minimizing long-term damage that has the potential of hindering return to economic growth (Wilkins, 2020). As such, Canadian governments at various levels have designed their response to foster good employer-employee relationships and help businesses to get over the difficulties occasioned by the pandemic. Some of the actions taken by the government include wage subsidies, loan programs, and assistance with commercial rent (Wilkins, 2020).

The Coronavirus disease whose effect started being felt across the world in March 2020 has had far-reaching impacts on the economy. Most notable among these are a sharp increase in commodity prices, as well as signs of distress in financial markets (Wilkins, 2020). In response to the latter, fiscal authorities in various countries took center-stage in attempts to mitigate economic impacts of the pandemic. At the same time, regulatory authorities loosened capital buffers with the aim of enabling banks to fulfil increased credit demands. Additionally, central banks resorted to reducing policy rates (Wilkins, 2020).

With COVID-19 being the most serious catastrophe faced by Canada in recent years, banks across the country remain actively committed to help citizens and businesses pull through the challenging times. The banking sector in the country has worked together with the government, regulators, and the central bank- the Bank of Canada- towards blunting the pandemic’s economic impact. Banks across the country have implemented relief initiatives while also creating customized plans to support individuals together with small business enterprises (Canadian Bankers Association, 2021). For instance, the banking sector has helped close to 800,000 homeowners to achieve mortgage flexibility; it has also provided payment deferrals for credit cards to over 482,500 individuals. Working in collaboration with the federal government, the sector has provided over 3.9 million citizens with the Canada Emergency Response Benefit, besides facilitating access to interest-free loans by over 879,000 small businesses. Equally important, the six biggest banks in the country have waived over $112 million as personal bank account fees between March 2020 and February 2021 (Canadian Bankers Association, 2021). These are just a few of the measures that banks in Canada are taking in response to the shocks, hardships, and disruptions caused by the COVID-19 pandemic.

Literature Review

Several financial institutions in Canada have come forward to help the government realize its objectives. The Bank of Canada is one of the institutions offering loan programs. Being Canada’s central bank, the Bank of Canada is mandated with promoting Canada’s economic as well as financial welfare. This is achieved via four main responsibility areas: monetary policy, currency, financial system, and funds management (Bank of Canada, n.d.). In brief, the bank of Canada regulates money supply so that inflation is kept low. It also promotes efficiency and safety of financial systems, besides designing, issuing, and distributes bank notes in the country. Lastly, the Bank acts as the government’s fiscal agent, managing public debt as well as foreign exchange reserves (Bank of Canada, n.d.).

According to Wilkins (2020), the Bank of Canada has lowered overnight rates to 25 basis points, down from 150 basis points. The Bank reduced its interest rate to 0.75% as an incentive for supporting economic activity. With lower interest rates, businesses together with individuals can not only take new loans but also find some relief in that the amount of money they have to pay on existing loans is substantially reduced. On the same note, the Bank of Canada has broadened the collateral against which borrowers can obtain loans. Apart from this, banks now have a longer duration to repay their loans. The Bank has also admitted more institutions as eligible borrowers (Bank of Canada, 2021).

The Bank of Canada also launched several purchase programs as well as liquidity facilities as part of its response to the pandemic’s economic impact. Through these facilities and programs, markets stayed functional, interest rates lowered, and credit flow stimulated (Bank of Canada, 2021). Specifically, the liquidity facilities are enabling banks to advance loans to individuals and businesses (Wilkins, 2020). One of the key purchase programs launched by the Bank is being more active in the Treasury bill. Here, the Bank has increased its take-up from 25% to 40%.  As stated in the Bank’s website, the Standing Liquidity Facility has been established to enable individual banks and financial institutions access ready funding when they need it.

Another measure that the Bank of Canada has taken in response to the COVID-19 pandemic is the large-scale purchase of long-term debt.  The Bank of Canada made the decision of implementing a purchase program targeting the bond market. In this program, the Bank has committed itself to buying at least $5 billion worth of Government of Canada securities weekly until it determines that the economy is on the path to recovery (Wilkins, 2020). This decision was informed by the reasoning that wide fluctuations in securities’ prices scares away investors. More importantly, government bonds in Canada are considered the safest asset since they are the benchmark against which prices of other assets are fixed (Wilkins, 2020). The implication of this is that unless the bond market is secured, the entire money market will be affected.

In a bid to minimize the strains facing money markets in the long term, the Bank of Canada has embarked on a program of purchasing secondary bonds. In full knowledge of the fact that short-term financing alone is not enough to manage risks, the Bank is devoted to buying $50 billion worth of provincial debt as well as $10 billion worth of corporate debt (Wilkins, 2020). This, according to the Bank, is an effective strategy of stimulating the economy and boosting employment together with output. To strengthen the mortgage market, the Bank of Canada has also decided to purchase Canada Mortgage Bonds, thereby making finance available to homeowners in the country (Wilkins, 2020).

Aside from this, the Bank’s top priority was restoring functioning of key short-term finance markets due to the fact that such markets are instrumental to businesses as well as individuals experiencing temporal income disruptions. As such, the Bank reasoned that individuals, households, businesses, and the entire financial system would adversely be affected by illiquidity. It therefore established a number of programs for the long-term purchase of assets. The aim of these programs was to make the major funding markets more liquid. It is worth noting that the Bank of Canada has discontinued most liquidity facilities and programs following the reopening of the economy and the gradual return to normal functioning (Bank of Canada, 2021). Some of the now discontinued programs are the Bankers’ Acceptance Purchase Facility, the Canada Mortgage Bond Purchase Program, the Corporate Bond Purchase Program, the Commercial Paper Purchase Program, and the Provincial Money Market Purchase Program (Bank of Canada, 2021). The program that is actively operational at present is the Government of Canada Bond Purchase Program, which essentially entails purchase of government bonds by the Bank of Canada.

Recognizing that COVID-19 is a global menace, the Bank of Canada has sought international cooperation as it strives to restore the Canadian economy. In its website, the Bank outlines several global policy-makers with whom it is working in coordination. More importantly, the Bank has established swap lines specifically dedicated to foreign exchange. Together with other central banks, the Bank of Canada is determined to make sure that financial institutions in the country can access foreign currency liquidity. These swap lines come in handy where Canadian banks are in need of borrowing money in a foreign currency. Subsequently, the Bank of Canada is granted extra flexibility for addressing the rapidly evolving changes and demands within financial markets.

In summary, the Bank of Canada’s response to the COVID-19 pandemic revolves around three core objectives. Firstly, the Bank seeks to provide and boost liquidity for financial institutions, which in turn enhances market functioning. Secondly, operational abilities of financial institutions are enhanced when markets are functioning properly. Thirdly, easing monetary policy through reduced interest rates enables banks to provide credit to households together with businesses.


The measures taken by The Bank of Canada in response to the COVID-19 pandemic are, to a large extent, necessary and effective in restoring the economy. Looking at the different actions that the Bank has taken, it is evident that the primary goal of the Bank is to help the people of Canada survive the difficult economic period occasioned by the pandemic. Precisely, the various measures are focused on the principal objective of making credit available as well as affordable to businesses so that they, in return, can pay their workers. By so doing, the Bank is striving to ensure that households in Canada can meet their essential needs.

The liquidity facilities together with purchase programs established by the Bank of Canada are helpful in mitigating the pandemic’s negative effect on the economy. Just to mention, the COVID-19 pandemic has had far-reaching economic impacts that include reduced growth of the labor force as well as lower productivity (Matveev, Donald-Guimond & Sekkel, 2020). There has also been a sharp decline in demand; this, coupled with the immense uncertainty surrounding the crisis dampens investor confidence and will, most likely, cause firms to cancel any investment projects or at best scale back their operations. To avoid such outcomes, the Bank of Canada’s measures aimed at stimulating economic activity and providing credit are remarkable. With the sharp drop in commodity prices as a result of the pandemic, the Bank of Canada has made commendable efforts towards stimulating growth by fostering borrowing by consumers as well as businesses (Lord & Saad, 2020).

Cooperating with international agencies is a laudable step that the Bank of Canada has taken. More precisely, the Bank’s efforts may be rendered somewhat ineffective in curbing the adverse economic impacts resulting from the pandemic if the Bank does not involve the international community. The explanation for this is the deep link between Canada’s neutral rate and the international neutral rate. Neutral rate is defined as “the policy rate needed to maintain economic output at its potential level and inflation at target after the effects of all cyclical shocks to the economy have dissipated” (Matveev et al., 2020 p.10). From this definition, it is clear the neutral rate is determined by a host of factors, both domestic and foreign. For a country like Canada whose economy is small and open, the neutral rate significantly depends on the global market. As such, it is only wise for the Bank of Canada to work in cooperation with foreign entities in its attempts to achieve economic stability.

Even so, the Bank of Canada’s decision to suspend most of the programs/facilities it had established is arguably ill-timed. In its website, the Bank states that it decided to discontinue market liquidity programs because the economy was reopening, meaning that core markets have started functioning normally. While this may be true to some extent, it must be kept in mind that COVID-19 is yet to be contained all over the world. With cases of second, third, fourth and subsequent waves of the disease breaking out and considered to be more severe than the first wave, the Bank’s discontinuation of liquidity programs is arguably premature. In any case, the Bank acknowledges the high uncertainty surrounding the pandemic, especially the duration it could last (Bank of Canada, 2021). What this implies is that although the market functioning may seem to be getting back to normal, there is still a possibility of a new wave of the disease that could send the economy crumbling down again. On top of this, many households and businesses are still trying to get back to their feet after being hard hit by the pandemic. In light of these considerations, discontinuation of liquidity programs is not a wise idea.

Apart from the above, there are undesirable effects of some of the strategies (long-term) that the Bank of Canada has developed in response to the pandemic. From the literature review, the Bank has suspended most liquidity programs, remaining with the so-called quantitative easing, which simply refers to buying financial assets in bulk. While this is necessary, it could produce adverse results. To begin with, quantitative easing has been found to exacerbate inequality (Dietsch & Best, 2021). The truth is that the Bank of Canada, like all other central banks, desires to stimulate economic activity by injecting liquidity into the financial market, it is unable to control the level of liquidity. Dietsch and Best (2021, para.14) report that “a lot of the liquidity has ended up in stock markets and housing markets, benefitting wealthy asset owners and helping to push the cost of owning a house beyond the means of many Canadians”. This means that Bank of Canada’s response to the pandemic is ineffective in that it worsens an already serious problem in the country: inequality.

Secondly, quantitative easing hinders neutrality in the financial markets, especially when it involves the purchase of corporate bonds. According to Dietsch and Best (2021), the buying of corporate bonds makes capital markets accessible to only the firms whose bonds are purchased. What this suggests is that purchase of corporate bonds promotes favoritism. In the words of Dietsch and Best (2021), buying corporate bonds in bulk instead of buying the bonds that are outstanding in a given market leads to inevitable reinforcement of the status quo. This not only slows transition to economic sustainability; it increases the amount of carbon footprints from companies.

In particular reference to the Bank’s purchase programs, it is inconclusive that these measures will produce the intended long-term results. Ideally, purchase of assets is intended to stimulate demand for long-term bonds, besides encouraging investment. However, recent experiences show that there is not much to be reaped from these programs. According to Pickering (2015), trillions of money have been injected into the international financial system recently but very little out of this amount has reached the real economy.

Lastly, quantitative easing is argued to generate effects that are intrinsically unreliable and indeterminate.  Loosely described as the act of creating money from nowhere and investing it in financial markets with the goal of reducing interest rates, quantitative easing is arguably not effective in the long-term. As stated by Stirling (2018), the effectiveness of monetary policy tends to get lost when rates of interest are pushed to very low levels. In other words, the measures currently taken by the Bank of Canada may reach a point where they will have no significant economic benefits.

Having identified some flaws in the Bank of Canada’s response to the COVID-19 pandemic, several suggestions are made regarding what the Bank could consider doing. One, it is necessary to develop and/or adapt unconventional policies that alleviate inequality. As proposed by Dietsch and Best (2021), it may be worthwhile for the central bank to use the helicopter money model for making credit accessible to citizens. The model entails increasing money supply via encouraging spending as well as through tax cuts. Although this model has its downsides, it may be helpful for jumpstarting the economy especially in the wake of declining prices.

A second recommendation is for the Bank of Canada to engage in serious innovation as far as its response to the pandemic is concerned. As it is, the Bank seems contented with the status quo. Being an institution with an innovation history especially in the area of monetary policy (Dietsch & Best, 2021), the Bank of Canada will only confront the many challenges it faces today by restoring its innovative zeal.


As the institution in charge of promoting Canada’s financial welfare, the Bank of Canada has been at the forefront in cushioning businesses and households in Canada against the economic shocks arising from the ongoing COVID-19 pandemic. The Bank has taken a range of measures that are aimed at boosting economic activity through promoting investor confidence and making credit accessible to businesses and individuals. Most of these measures reflect what economists refer to as quantitative easing, stimulating economic activity and growth by making new money from the void and investing it in financial markets. As found in the analysis of the specific programs and measures that the Bank of Canada has implemented to blunt the pandemic’s economic impact, there are serious consequences arising from most of these measures. Other than being undependable and uncertain, quantitative easing worsens inequality and creates an unfair playing field for financial institutions. In light of these, it is recommended that the Bank of Canada should review its current response and explore alternative measures besides quantitative easing.


Bank of Canada. (2021). COVID-19: actions to support the economy and financial system.

Bank of Canada. (n.d.). About the Bank.

Canadian Bankers Association. (2021). Canada’s banks are standing by Canadians.

Dietsch, P. & Best, J. (2021). The Bank of Canada must seize the pandemic moment and do more for Canadians. The Conversation.

Lord, P., & Saad, L. (2020). Outline of government programs related to the COVID-19 pandemic in Canada. SSRN Journal. Preprint posted online on April6, 2020.

Matveev, D., Donald-Guimond, J. & Sekkel, R. (2020). The neutral rate in Canada: 2020 update.

Pickering, C. (2015). A better alternative to QE. The Australian.

Stirling, A. (2018). An alternative to QE: was Billy Bragg right after all?

Wilkins, C. (2020). Bridge to recovery: the Bank’s COVID-19 pandemic response.

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