A Bank of Canada official said that quantitative tightening will likely end in late 2024 or in 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 C $20 billion $14.7 billion to C $60 billion, from the current level of roughly C $200 billion.
The expected range would put the size of the balance sheet at about 1% or 2% of Canadian gross domestic product, although the level isn't set in stone. That compares to the long-run level of reserves needed by the Federal Reserve, which is estimated to be about 10% to 13% of US gross domestic product.
It is important to remember that we are still working to bring aggregate supply and demand back into balance. Gravelle said Wednesday that our main tool for doing this is our policy rate. Our balance sheet must be normalized in order to remove the support it provides to monetary policy. 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.
In order to assess the impact of its previous hikes, the central bank held borrowing costs steady at 4.5% earlier this month. After the speech, Gravelle said policymakers have a more heightened concern for positive shocks to aggregate demand or growth and that it is 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, along with the estimate of what steady-state holdings will likely be. The end date may change slightly as other parts of the balance sheet - including government deposits and currency in circulation - evolve, Gravelle said.
Gravelle said that while Canada's financial system has a well-earned international reputation for stability, it is not immune to spillover effects. In response to a question, Gravelle said that the government-brokered takeover of Credit Suisse by rival UBS was a wake-up call for policymakers, but downplayed concerns about domestic lenders.
He said in the speech that we are ready to act in the event of severe market-wide stress and to provide liquidity support to the financial system.
Gravelle said policymakers are closely monitoring stresses in the global banking system 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 speech of the deputy governor also looked back on lessons learned from deploying extraordinary liquidity measures during the Covid-19 epidemic, including the mass purchase of Canadian government bonds.
Gravelle said that the bar is very high for us to use large-scale GOC bond purchases to support market functioning. He said that the Bank of Canada would better explain the difference between purchases made to support market operations and those intended to complement monetary policy, like quantitative easing.
If the bank is ever forced to step in again, it will have an eye to mitigating moral hazard, he said.
The US Economy needs no credit crunch, none of it is the last thing that a srained US economy needs to do.