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Bank of Canada outlook signals the legacy of COVID-19 crisis will linger for years

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Central banks around the world have insisted for months that the fight against the economic effects of COVID-19 will require more than low interest rates, a call heard in Ottawa, where Prime Minister Justin Trudeau is overseeing one of the world’s most generous support programs.

“Prudence a generation ago meant deep cuts to public spending,” Finance Minister Chrystia Freeland said in a speech on Oct. 28, referring to the debt crisis that Jean Chrétien’s government confronted in the mid-1990s. “Today, it means we support our people and businesses as they battle this pandemic, then move beyond it, and ultimately thrive in the recovery that will follow.”

Much of what the Bank of Canada is doing to revive the economy is unprecedented, so it shouldn’t be a surprise that adjustments will be needed from time to time.

Policy-makers decided during their latest deliberations that they should be even more explicit about how long they plan to keep the benchmark rate at 0.25 per cent, which is as low as they think it can go without disrupting the financial system.

The central bank also rejigged its bond-buying program. It will now favour Government of Canada bonds that mature in three or more years, an acknowledgement that the central bank might have been inadvertently depriving investors of popular, low-risk securities that allow financial markets to function smoothly.

The Bank of Canada said it will “gradually” slow its purchases of federal debt to $4 billion per week from the current $5-billion target, but that the emphasis on longer-dated securities would “provide at least as much monetary stimulus as before” since households and businesses tend to borrow over extended periods.

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