But the policy rate isn’t the only way we can affect the longer-term interest rates that matter to Canadians. When we can no longer reduce our policy rate, we need to dig deeper into our tool kit if we want to further stimulate the economy.
One important instrument in our extended tool kit is QE, so let me begin by explaining how QE affects interest rates. When the Bank buys government bonds of a given maturity, it bids up their price. This, in turn, lowers the rate of interest that the bond pays to its holders.