As Bank of Canada readies rate call, documents suggest feds will watch closely

Ottawa -

Federal officials' apparent lack of concern about the impact central bank actions have on managing government debt, shown in internal documents, is about to face a test as the Bank of Canada is poised to slow the pace of its bond-buying program.

The briefing note from late last year appears to gloss over the bond-buying program despite the extraordinary effect it was having on debt yields.

The central bank has encouraged interest rates at historic lows since the pandemic began by keeping its key rate at near-zero and purchasing federal bonds at an unprecedented pace.

The Bank of Canada is widely expected to reduce its weekly purchases of federal bonds as part of a scheduled rate announcement on Wednesday morning.

If it pulls back from purchases, demand for federal bonds would drop and rates would rise, which could affect the costs for the federal government to refinance billions in debt coming due.

Rebekah Young, director of fiscal and provincial economics at Scotiabank, says the connection to the debt means the central bank will have to clearly explain any changes in bond purchases so markets don't worry decisions are being made to help federal finances.

This report by The Canadian Press was first published July 13, 2021.