Deputy Governor Toni Gravelle provides an update on when quantitative tightening will end and explains how the Bank of Canada will manage its balance sheet going forward.
Watch Deputy Governor Gravelle speak to VersaFi in Toronto. Read the full speech.
When quantitative tightening will end
During the COVID-19 pandemic, the Bank’s balance sheet expanded by a lot. This is because of the emergency measures we took early in the crisis to make sure financial markets continued to function, and then because we used quantitative easing, or QE, to help the economy recover.
In April 2022, we started shrinking our balance sheet using a process called quantitative tightening, or QT. Since then, our balance sheet has shrunk by a lot because our settlement balances—or central bank reserves—have declined. Settlement balances are now close to where we want them to be, which is in the range of $50 billion to $70 billion. We need to keep some settlement balances on our balance sheet to satisfy two types of demand:
- payment system demand—reserves to support day-to-day transactions in Canada’s financial system
- precautionary demand—reserves that can be used by financial institutions as a buffer against an unexpected shock or sudden need for liquidity
Keeping settlement balances in our estimated range will help us implement our monetary policy effectively. It will also help promote a stable and efficient financial system. Demand for settlement balances could change over time as the financial system evolves, so we might change how much we supply. But we’ll be keeping a close eye on precautionary demand. We don’t want banks or other big financial players to rely on reserves too much for their liquidity needs.
With settlement balances getting closer to our estimated range, we expect to end QT in the first half of 2025. And when QT ends, we will resume our business-as-usual asset purchases.
It’s been a long road—almost three years since we began QT—but we are just about finished the QT process and the unwinding of our QE-related asset holdings.”
How we will manage our balance sheet going forward
The Bank needs assets on our balance sheet to match our liabilities. So, when QT ends, we will need to start buying assets again as part of our normal balance sheet management. This is very different from buying assets to stimulate the economy, or QE.
It’s also important to understand that while our balance sheet management will go back to normal, the composition of our assets won’t be back to normal right away. Before the pandemic, we had a mix of longer-term assets, such as Government of Canada (GoC) bonds, and shorter-term assets, such as GoC treasury bills (t-bills) and term repurchase agreements, or repos. Right now, our asset portfolio is almost entirely GoC bonds.
When QT ends, we will start growing our assets again through term repo operations, and then we’ll build up our holdings of t-bills. When we eventually start buying government bonds again, we will do so by purchasing already-issued bonds in the secondary market, like other major central banks—rather than newly-issued bonds in the primary market via Government of Canada auctions.
Our normal asset purchases before the pandemic were not QE. And our normal asset purchases after QT ends will not be QE either.”
We will be transparent about each step
As we wrap up QT and return to normal balance sheet management, we will continue to be as transparent and predictable as possible. We will announce the end of QT in the first half of this year. At that time, we will also provide details on the timing of our initial asset purchases, along with expected amounts. Thereafter, we will continue to publish our purchase plans in advance.
Market participants can count on us to communicate our next steps clearly and ahead of time. And all Canadians can count on us to manage our balance sheet in a way that both lets us achieve our monetary policy mandate and promotes a stable and efficient financial system.”
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