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Bank of Canada Unveils Endgame for Quantitative Tightening by 2025


Michael Chen

March 21, 2024 - 14:29 pm


Bank of Canada’s Quantitative Tightening Strategy Set to Conclude in 2025

The Bank of Canada has announced that its current policy of quantitative tightening is projected to end by the year 2025, as communicated by a key official. During a speech in Toronto, Deputy Governor Toni Gravelle emphasized that the Bank's focus would then shift towards the assessment of asset acquisitions in both the primary and secondary debt markets.

Canada's Path to Economic Balance

Deputy Governor Gravelle reaffirmed predictions that the quantitative tightening procedure would be concluded once settlement balances fall within the $20 billion to $60 billion bracket, a significant decrease from the present figure of around $100 billion.

"The bottom line is the balance sheet normalization process is continuing as we laid out last year, and we have tools to manage any temporary funding pressures that might come up along the way," Gravelle stated.

This declaration serves to alleviate any lingering uncertainties regarding the Bank's intentions to dwindle its balance sheet, a plan which has remained consistent over the past year. Its end is now foreseen to occur "sometime in 2025", which is a slight deviation from the initial timeframe.

Officials adjust their outlook based on the anticipation that the government of Canada will have lesser deposits than previously estimated on the central bank’s balance sheet, an adjustment that would prolong heightened settlement balances.

The Strategy of Asset Acquisition

Gravelle reported the prospective range for settlement balances to persist as outlined in March of the previous year. Nonetheless, discussions are underway at the bank concerning future approaches to resuming asset purchases. Deliberations include whether to procure government of Canada treasury bills and bonds on the secondary market, during primary debt auctions, or an integration of both methods.

"In our endeavor to stabilize the bank’s balance sheet, we will commence purchasing government of Canada bonds and other assets. These acquisitions should not be confused with the quantitative easing, which was aimed at energizing the economy during the pandemic era," explained Gravelle.

The Deputy Governor cemented the notion that quantitative tightening could carry on in conjunction with the reduction of interest rates. With the closure of this program, the purchasing of Canada Mortgage Bonds will cease as the bank aims to diversify its investment portfolio to include a variety of asset types and maturities.

"We are looking to reestablish a diverse asset mix with a wider range of durations, including an elevated number of short-term assets compared to our current holdings. Even so, the Government of Canada bonds will remain our predominant asset," Gravelle elaborated.

Withdrawal of Economic Stimulus

Under the leadership of Governor Tiff Macklem, the Bank of Canada has been on a balance sheet reduction trajectory for approximately two years, following the extraordinary stimulus provided by quantitative easing during the COVID-19 pandemic. The Bank's assets have declined from an excess of $575 billion to approximately $307 billion through the natural maturation of government bonds, signifying the retraction of liquidity from the financial system.

This process has led to the diminution of settlement balances—these are interest-bearing deposits that also serve as the payment method within Canada’s high-value payment system, named Lynx.

Ensuring Stability in Financial Markets

Earlier in the year, the emergence of liquidity pressures in funding markets raised speculation among economists and analysts over a potential scarcity of settlement balances within Canada's financial ecosystem, an issue that could have expedited the cessation of quantitative tightening.

However, Gravelle reiterated that the recent strains on overnight funding markets should not be interpreted as an indication that the bank would need to halt its balance sheet reduction ahead of schedule.

The Canadian Overnight Repo Rate Average (Corra) experienced elevation above the Bank of Canada's overnight-rate target for a significant duration in January, prompting the central bank to undertake a sequence of repo operations. This period also saw the government reintroduce auctions for receiver general balances, after which Corra realigned with the Bank's overnight rate.

Interest Rate Projections and Policy Outlook

At their fifth consecutive meeting in March, officials maintained the key overnight rate at 5 percent. Projections from economists polled by Bloomberg indicate that policymakers may initiate a decline in borrowing costs, starting from June of the current year.

This forward-looking stance represents the careful balancing act the Bank of Canada strives to perform, iteratively fostering an environment of sustainable economic growth and stability while cautiously unwinding measures implemented in response to past challenges.

As part of the bank's commitment to transparency and clarity, information and updates on policy decisions can be found through their official channels. To stay informed on the actions and rationales of the Bank of Canada, one can visit their official website at Bank of Canada.

Tailoring the Future Financial Landscape

As the Bank of Canada meticulously shapes its exit from the quantitative tightening era, the implications for both markets and consumers are substantial. The goal remains to gradually reabsorb the immense level of liquidity introduced during the most intense periods of the pandemic without disrupting the delicate balance of the financial ecosystem.

Gravelle's speech, delivered in Toronto, marks an important moment of communication between the central bank and the public it serves. By delineating the projected completion of the quantitative tightening by 2025, preparing for asset purchase resumption, and confirming a steadfast hold on interest rates, the Bank of Canada has provided much-needed guidance for markets and institutions at a time of global economic recalibration.

This comprehensive approach to balance sheet normalization reflects a broader, strategic vision that prioritizes long-term economic health over short-term expediency. By ensuring a structured and transparent exit strategy, the Bank of Canada maintains its central role as a cornerstone of fiscal prudence and responsible monetary policy within the Canadian economy and serves as a stabilizing force in the continuing recovery from global economic upheaval.

Conclusion: Monitoring and Adapting to Changing Dynamics

The Canadian economy, like others around the world, continues to navigate the complex aftermath of the COVID-19 pandemic. The Bank of Canada's strategies serve not just to address immediate market concerns but also to lay down the foundation for enduring stability and growth.

As Deputy Governor Toni Gravelle articulates the nuances of the bank's plan, what becomes evident is a proactive and responsive institution, ready to employ both tried-and-true measures and innovative approaches to achieve fiscal stability. This includes the critical examination of past practices, the recalibration of policy tools, and the forward-looking engagement with potential market scenarios.

As we edge closer to the projected end of quantitative tightening in 2025, the Bank of Canada's policies will remain under close scrutiny. The balancing act of maintaining economic stability while unwinding emergency measures is a challenge that will require agility, precise timing, and an adherence to a well-structured plan. This will be the benchmark against which the success of the Bank of Canada's actions will be judged in the coming years.

Navigating Uncertainties with Steadfast Policy

By outlining these strategic initiatives, the central bank also assuages market concerns regarding earlier-than-anticipated conclusion of quantitative tightening owing to systemic liquidity strains. Gravelle's reiteration of the bank's suitability to continue the current quantitative tightening course reassures markets that the Bank of Canada retains the ability to navigate uncharted economic waters with certainty and clear direction.

In an economic climate that has recently been marked by volatility and unpredictability, such reassurances are vital for maintaining investor confidence and fostering a healthy financial environment conducive to growth and opportunity.

Looking ahead, the Bank of Canada's carefully planned approach and adherence to sound economic principles will likely continue to serve as its North Star, guiding the institution as it charts unique paths to mitigate financial challenges and drive the Canadian economy forward.

In sum, as the Deputy Governor Gravelle articulates the bank's gradual retreat from heightened liquidity levels, the central narrative remains one of prudence, stability, and careful consideration for both the immediate and the long-term fiscal health of Canada.

While the end of quantitative tightening nears, the Bank of Canada remains committed to ensuring the soundness of the nation’s financial architecture, striving towards restoring balance and paving the way towards sustainable economic progress.