By Kelsey Johnson and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada said on Thursday that the measures it has taken to help stabilize financial markets during the coronavirus pandemic appear to be working but expressed concern over vulnerabilities in the energy sector.
The central bank cut its key overnight interest rate three times in March to 0.25% and launched its first ever large-scale bond-buying program. The bank reiterated it could adjust the scale of the programs as needed.
In an annual review of Canada’s financial systems, the bank said its measures “are showing signs of succeeding.” It added, “Access to liquidity has greatly improved in key financial markets that had been showing signs of financial stress.”
The risk of credit downgrades has intensified refinancing risks, particularly for oil and gas firms hit by low demand and slumping prices, it noted.
“The energy sector has the most refinancing needs over the next six months – C$6 billion ($4.3 billion) – and faces the most potential downgrades. This sector’s ability to secure refinancing will be particularly tested with low oil prices,” it said.
Canada is a major exporter of oil.
Government credit programs, the bank said, should help mitigate some of the sector’s challenges.
A range of emergency fiscal measures announced by Ottawa also helped tackle immediate impacts of the pandemic, the bank said. Those programs are equal to about 12% of Canada’s GDP.
The central bank said its own programs helped improve liquidity and functioning across a wide range of markets, where “signs of panic” were evident when the crisis began as investors focused on worst-case scenarios.
“Without the aggressive policy responses, banks would be fairing much worse, with important negative effects on the availability of credit to households and businesses,” it said.
New issuance of Canadian corporate bonds rebounded to around C$17 billion in April, one of the strongest monthly volumes seen since 2010.
(Reporting by Kelsey Johnson and David Ljunggren; Editing by Will Dunham)
