Bank of Canada minutes released
A Bank of Canada official said quantitative tightening will likely end in late 2024 or the first half of 2025, at which point the central bank would start buying assets again.
In a speech at the National Bank Financial Services Conference in Montreal, Deputy Governor Toni Gravelle said that the program is expected to run its course once settlement balances have reached a range of $20 billion (US$14.7 billion) to $60 billion, from the current level of roughly $200 billion.
While the level “isn’t set in stone,” the expected range would put the size of the balance sheet at about 1 per cent or 2 per cent of Canadian gross domestic product. That compares with the long-run level of reserves needed by the Federal Reserve, recently estimated to about 10 per cent to 13 per cent of US gross domestic product.
“It’s important to remember we’re still working to bring aggregate supply and demand back into balance. Our main tool for doing this is our policy rate,” Gravelle said Wednesday. “But our balance sheet must continue to normalize to remove the support it provides to monetary policy.”
It’s the first time the Bank of Canada has put a date on the exit from its tightening program, which started in April 2022, about a month after policymakers began their cycle of rapid interest-rate increases.
The central bank held borrowing costs steady at 4.5 per cent earlier this month, moving to the sidelines to assess the impact of its previous hikes. Responding to audience questions after the speech, Gravelle said that policymakers have a “more heightened concern” for positive shocks to aggregate demand or growth, adding that it’s “way too early” to talk about normalizing interest rates.
The timing of the QT wind-down is based on the maturity structure of the central bank’s current bond holdings, combined with the estimate of what steady-state holdings will likely be. However, the end date “may shift slightly” as other parts of the balance sheet — including government deposits and currency in circulation — evolve, Gravelle said.
Gravelle also addressed recent stresses in the global banking system, and said that while Canada’s financial system has “a well-earned international reputation for stability,” it’s not immune from spillover effects. In response to a question, Gravelle called the the government-brokered takeover of Credit Suisse by rival UBS a “wake-up call” for policymakers, but downplayed concerns about domestic lenders.
“We’re ready to act in the event of severe market-wide stress and provide liquidity support to the financial system,” he said in the speech.
Policymakers are closely monitoring stresses in the global banking system, Gravelle said, and “will consider the macroeconomic impact of this evolving situation” as they prepare a new set of forecasts to be released alongside the bank’s next decision on April 12.
The deputy governor’s speech also looked back on lessons learned from deploying extraordinary liquidity measures during the Covid-19 pandemic, including the mass purchase of Canadian government bonds.
“I want to be clear that the bar is very high for us to use large-scale GOC bond purchases to support market functioning again,” Gravelle said. He added that in the future the Bank of Canada would better explain the difference between purchases made to support market operation and those intended to compliment monetary policy, like quantitative easing.
If the bank is ever forced to step in again, it will also “have an eye to mitigating moral hazard,” he said.