MNI: BOC Ending QT In 1st Half, Leading Major Central Banks
MNI (OTTAWA) - The Bank of Canada plans to announce it's ending QT in the first half of the year and becoming the first major central bank to do so, though it will take until the end of this decade until the balance sheet mix returns to normal, Deputy Governor Toni Gravelle said Thursday.
The target for settlement balances, often known outside Canada as central bank reserves, is also being boosted to CAD50-70 billion from an earlier estimate of CAD20-60 billion after market consultations, Gravelle said in the text of a speech he's giving in Toronto. He also confirmed the Bank is switching to purchase government bonds from secondary markets rather than primary auctions, an option MNI reported earlier after obtaining a review via a freedom-of-information request.
The Bank needs to end QT ahead of a major bond maturity coming Sept. 1, Gravelle said, and settlement balances are expected to reach the target range around mid-year. Targeted settlement balances may change over time and officials are monitoring demand coming from what's needed to ensure smooth handling of large payments and "precautionary demand," Gravelle said.
"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," he said.
With the Bank's balance sheet now dominated by bonds, the return to more regular asset purchases will begin with term repos and then treasury bills, he said. Purchases need to start "well before September" he said.
"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," Gravelle said. One reason for that is because Canada avoided QE in 2008 and its balance sheet was smaller than peers relative to GDP.
Over time the Bank will match bond holdings to the stock of currency in circulation and shorter-term assets to liabilities such as settlement balances. Treasury bill purchases should resume in the fourth quarter with small amounts, and bond purchases near the end of next year, Gravelle said.
"Secondary market (bond) purchases align with benchmark practices at other major central banks that buy their home jurisdiction’s government bonds as part of their normal-course balance sheet management," he said. The move away from the pre-pandemic buying at primary auctions also gives the Bank flexibility in choosing assets and helps markets see more regular pricing for off-the-run securities.
The speech comes the day before the Bank publishes a review of pandemic-era policies. The Bank has defended QE criticized by the leading candidate to win this year's federal election, saying it was worth the risk to stave off deflation and mass unemployment.
Conservative Party Leader Pierre Poilievre has said he will fire Governor Tiff Macklem in part for enabling reckless government deficits that drove inflation to 8%. The NDP has also said the Bank held rates high for too long and risked a needless recession. Governing Liberals defended the Bank's independence, while saying they were eager like most Canadians for interest rates to decline.
The Bank's balance sheet grew to CAD575 billion from CAD125 billion during the pandemic including almost half the stock of federal government bonds. The central bank is also booking unprecedented losses tied to QE that required the government to amend legislation to facilitate the accounting.