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Bank of Canada sees quantitative tightening ending in 2025

A Bank of Canada official recently indicated that quantitative tightening (QT) is likely to conclude in 2025, with plans to consider purchasing assets in both primary and secondary debt markets thereafter.

Deputy Governor Toni Gravelle, speaking in Toronto, reiterated that the QT program is anticipated to reach its conclusion as settlement balances fall within a range of $20 billion to $60 billion, down from the current level of approximately $100 billion.

Gravelle emphasized the continuity of the balance sheet normalization process, stating, "We have tools to manage any temporary funding pressures that might come up along the way." This suggests that the central bank's strategy for shrinking its balance sheet remains consistent, helping to dispel speculation about an imminent winding down of QT.

The anticipated end date for QT has been pushed slightly to "sometime in 2025," primarily due to expectations that the government of Canada will maintain fewer deposits with the central bank, thereby prolonging elevated settlement balances.

The normal range for settlement balances remains consistent with previous projections outlined by Gravelle. However, the bank is now contemplating the resumption of asset purchases, including government of Canada treasury bills and bonds in secondary markets, or during primary debt auctions, or a combination of both.

Gravelle clarified that the intention behind these purchases is to stabilize the bank’s balance sheet, distinguishing them from the pandemic-era asset purchases aimed at stimulating the economy. He reiterated that these future purchases will not constitute quantitative easing.

Even as interest rates normalize, the bank asserts its ability to continue QT until its conclusion. Upon cessation of the program, the bank intends to cease purchasing Canada Mortgage Bonds and diversify its purchases to restore a balanced mix of assets with a broader range of maturities.

Under Governor Tiff Macklem's leadership, the Bank of Canada has been reducing its balance sheet for approximately two years, retracting the extraordinary stimulus provided during the COVID-19 pandemic. This reduction has led to a decline in assets from a peak of over $575 billion to around $307 billion, primarily through the maturation of government bonds held by the bank.

The diminishing balance sheet has also resulted in the withdrawal of settlement balances, which are interest-bearing deposits used in Canada's high-value payment system, known as Lynx.

Earlier concerns regarding liquidity pressures in funding markets prompting speculation about an early end to QT were addressed by Gravelle, who asserted that recent strains were not indicative of a need to halt the shrinking of the balance sheet prematurely.

Despite challenges in overnight funding markets earlier this year, officials have maintained the key overnight rate at 5 percent for the fifth consecutive meeting in March. Economists anticipate a commencement of interest rate reductions in June, according to a Bloomberg survey.