Written by 1:37 PM Bank of Canada • One Comment Views: 7,987

Bank of Canada to end quantitative tightening earlier than expected

The Bank of Canada expects to end quantitative tightening in the first half of this year and return to more normal asset purchasing levels, likely becoming the first major central bank to unwind its pandemic asset purchases.

Toni Gravelle - Bank of Canada

Deputy Governor Toni Gravelle made the announcement in a recent speech in Toronto, explaining how QT—or “balance sheet normalization”—has achieved its goals.

“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,” Gravelle said on Thursday. “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.”

What is quantitative tightening?

Quantitative tightening, or QT, is when a central bank reduces its balance sheet. This happens by letting bonds it holds mature without buying new ones, effectively pulling some of the liquidity it injected into the economy back out.

It’s the opposite of quantitative easing (QE), which floods the market with money to lower borrowing costs and stimulate the economy.

In Canada, QE started in March 2020 at the height of the pandemic. The BoC bought government bonds on a massive scale to stabilize financial markets and keep borrowing costs low for consumers and businesses. By 2021, the BoC’s balance sheet had grown to roughly $395 billion.

As the economy bounced back, the BoC shifted gears to QT in April 2022, stopping new bond purchases and letting old ones mature. Since then, the balance sheet has shrunk to $130 billion, according to Gravelle, as part of an effort to cool inflation, which soared to multi-decade highs in 2022.

Historical and projected Bank of Canada settlement balances

Why end QT now?

In short, Gravelle said QT has done its job. By steadily reducing its balance sheet, the BoC has tightened financial conditions to complement its interest rate hikes, which have helped bring inflation under control.

Gravelle said the Bank of Canada initially expected QT to end when settlement balances reached $20-$60 billion, but an updated assessment of precautionary demand has raised the target to $50-$70 billion.

Settlement balances are projected to drop below the $50-$70 billion range by Q3 2025, driven by the maturity of a significant Government of Canada bond on September 1.

“To achieve a smoother glide path for settlement balances as they fall ahead of that large maturity, we will need a transition process where asset purchases help to offset the sharp and sudden drop,” Gravelle said. “That means we will need to restart our normal-course asset purchases gradually, and well before September.”

Scotiabank economist Derek Holt said Gravelle’s comments “put a bit more meat on the bone” with regards to the Bank of Canada’s long-term plans for managing its balance sheet, including the size, composition, and its role in the bond market and payments system.

“Maybe they sought to provide a bit more certainty about their framework into a period of heightened macroeconomic uncertainty,” he wrote.

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Last modified: January 17, 2025

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

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