Bank of Canada expects to end quantitative tightening in 2025

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The Bank of Canada expects to end quantitative tightening during the first half of this year and will return to more normal levels of asset purchasing.

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“We expect to announce the end of QT and the associated restart of our business-as-usual asset purchases in the first half of this year,” said Bank of Canada deputy governor Toni Gravelle, during remarks to VersaFi, in Toronto. “Given this timeline, I expect we will be the first major central bank, or among the first, to finish unwinding its pandemic-related QE asset purchases.”

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Settlement balances, also known as central bank reserves, peaked at $395 billion during the pandemic. This was thanks to the central bank’s decision to implement quantitative easing (QE), when the central bank purchases government bonds and financial assets to stimulate economic activity. The Bank of Canada ended QE in October 2021 and began the process of quantitative tightening (QT) in April 2022, by letting the central bank’s bond holdings roll off the balance sheet when they matured, without replacing them.

Now, the central bank reserves currently sit at $130 billion. Originally, the central bank thought QT would end when the settlement balances declined to the $20 to $60 billion range. However, after speaking to banks and members of Canada’ high-value wholesale payment system, precautionary demand for settlement balances was higher than what was initially estimated by the Bank of Canada.

“Due to our updated assessment of precautionary demand, we have revised the range upward to between $50 to $70 billion,” said Gravelle.

Most of the central bank’s asset purchases are comprised of Bank of Canada bonds, with a large portion of those bonds set to mature on Sept. 1, 2025. To maintain the balance sheet at preferred range, the Bank of Canada will resume the purchasing of Treasury bills by the fourth quarter of this year. Additionally, the central bank will purchase Government of Canada bonds again starting at the end of 2026.

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“When QT is done, we’ll go back to managing the balance sheet in a way that looks a lot like how we managed before the pandemic,” said Gravelle. “Crucially, when we start buying assets, these will be normal, passive purchases, reflecting the growth in currency — not QE.”

Despite the upward revision of the settlement balances range, Gravelle warned financial market participants not to over-rely on the central bank’s reserves.

“We don’t want to see major banks and other core financial institutions under-investing in their capacity to robustly manage their liquidity because they have developed an unhealthy over-reliance on settlement balances,” said Gravelle. “In managing their liquidity assets, financial market participants should be able to respond to fluctuations in those needs in other ways — for example, through access to markets.”

Repo markets have faced pressure as those bonds have matured, creating less liquidity in financial markets. The Bank of Canada has made several interventions. Gravelle says the decision to end QT has nothing to do with concern over what is happening in repo markets.

“Our assessment is that, for the most part, other factors are causing these pressures,” he said. “Through our most recent monitoring and discussions, we can see that hedge fund activity and positioning continue to contribute to higher funding requirements sourced in the repo market.”

• Email: jgowling@postmedia.com

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