Bank of Canada Predicts Conclusion of Quantitative Tightening in 2025

Bank of Canada projected conclusion of Quantitative Tightening

In a recent address in Toronto, Deputy Governor Toni Gravelle of the Bank of Canada projected the culmination of quantitative tightening (QT) by 2025. Gravelle emphasized the likelihood of the central bank exploring asset purchases. These purchases would occur in both primary and secondary debt markets following the cessation of QT.

QT Program Near Its End

The deputy governor reiterated that the Quantitative Tightening (QT) program will conclude once settlement balances fall within a range of C$20 billion to C$60 billion. This marks a significant drop from the current level of approximately C$100 billion. Gravelle underscored the bank’s readiness to address any transient funding constraints that may arise during this transition period.

“The deputy governor’s assurance on concluding QT within a C$20-60B range reflects prudent monetary policy,” according to Barron’s Subscription.

Maintaining Stability Amidst Transition

Gravelle’s remarks suggest a continuity in the central bank’s strategy, aiming to reduce its balance sheet without significant deviations from the outlined plans. This announcement is expected to allay speculations regarding the imminent cessation of QT.

Extended Timeline for Conclusion

The timeline for concluding QT has been extended to “sometime in 2025.” The government of Canada anticipates maintaining fewer deposits on the central bank’s balance sheet, thus prolonging elevated settlement balances.

Modalities for Asset Purchases Under Consideration

The envisaged standard level for settlement balances remains consistent with the previous range articulated by Gravelle in March of the preceding year. Nonetheless, the bank is presently deliberating on the modalities for resuming asset purchases. They are contemplating the acquisition of Government of Canada treasury bills and bonds through secondary markets or primary debt auctions, or a combination of both avenues.

Clarification on Asset Purchases

Gravelle clarified that the resumption of asset purchases aims to stabilize the bank’s balance sheet, a move aligned with what the Bank of Canada projected. This distinction sets it apart from the pandemic-era asset acquisitions, which primarily aimed for economic stimulus. He emphasized that these future purchases would not constitute quantitative easing.

Smooth Transition Assured

Moreover, Gravelle affirmed the bank’s capacity to continue QT while concurrently lowering interest rates to more conventional levels. Post the conclusion of QT, the bank intends to cease the acquisition of Canada Mortgage Bonds and diversify its asset portfolio.

Steady Reduction of Balance Sheet

The central bank, led by Governor Tiff Macklem, has been steadily reducing its balance sheet over the past two years. This action reverses the extraordinary stimulus introduced during the Covid-19 pandemic. This reduction has seen its assets dwindle to approximately C$307 billion from a peak exceeding C$575 billion.

Addressing Liquidity Concerns

As a consequence of this reduction, settlement balances, which serve as interest-bearing deposits in Canada’s high-value payment system (Lynx), have diminished. Earlier this year, concerns arose about liquidity constraints in funding markets potentially hastening the end of QT. However, Gravelle reiterated that recent strains in overnight funding markets do not require an accelerated cessation of balance sheet reduction.

Economic Projections Amidst Policy Shifts

The central bank has maintained the overnight rate at 5% for the fifth consecutive meeting in March. Economists surveyed by Bloomberg anticipate a commencement of lowering borrowing costs by June. This projection reflects a broader anticipation of economic adjustments amidst the evolving monetary policies of the Bank of Canada.

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