Bank of Canada to Cease Its Quantitative Tightening Program Within Months, According to RBC

Bank of Canada to Cease Tightening Program

In an unexpected turn of events, the Bank of Canada is poised to conclude its quantitative tightening program earlier than initially projected, with predictions pointing to a potential wrap-up as early as April. RBC Capital Markets strategists have been closely monitoring the central bank’s actions, noting that Governor Tiff Macklem’s approach deviates from prior indications.

Balancing Act: Shifting to a Stable Balance Sheet Policy

The central bank, actively reducing its balance sheet for nearly two years, is set to adopt a “stable balance sheet policy” around its April 10 rate decision, according to Simon Deeley, RBC’s director of Canada rates strategy. This shift marks a divergence from the existing quantitative tightening measures. The Bank of Canada intends to resume buying Canadian government bonds, replacing maturing ones.

“The central bank’s shift to a stable balance sheet policy signals a departure from prior tightening measures, promoting economic stability,” according to Bloomberg.

Timing the Turn: Alignment with Rate Cut Projections

Deeley suggests that the conclusion of quantitative tightening may coincide with the anticipated first rate cut, forecasted by RBC strategists to occur no later than June. While Deputy Governor Toni Gravelle had previously outlined a timeline extending to late 2024 or early 2025 for winding down quantitative tightening, recent indicators in short-term funding markets have prompted speculation of an accelerated timeline.

Monetary Policy Puzzle: Addressing Corra Anomalies

The Bank of Canada’s monetary policy framework, reliant on a target for the overnight lending rate, has faced recent anomalies. The Canadian Overnight Repo Rate Average

Has deviated from the Bank of Canada’s target, soaring to as high as 5.07%. This detachment indicates a tightening liquidity environment in the repo market, prompting closer scrutiny from analysts and market participants.

Economic Landscape: Navigating Uncertainties

This unexpected shift in the central bank’s approach comes amid global economic uncertainties. Various factors, including the ongoing impacts of the Covid-19 pandemic, fuel these uncertainties. The Bank of Canada’s decision to conclude quantitative tightening earlier than anticipated reflects its proactive stance. This approach highlights the central bank’s commitment to navigating economic challenges and ensuring financial stability.

Official Silence: Analysts Await Guidance

The Bank of Canada has not officially commented on the accelerated timeline for concluding quantitative tightening. Analysts and market participants will be closely monitoring upcoming decisions and announcements. The potential early conclusion of the quantitative tightening program could send ripples through financial markets, influencing interest rate expectations. This has the potential to shape the economic outlook for Canada in the coming months.

“The Bank of Canada’s silence on accelerated tightening raises market anticipation, potentially reshaping Canada’s economic outlook,” said Barron’s.

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