MNI: BOC QT May Finish By End of 2024, Ample Reserves Stay

Bank of Canada Deputy Governor Toni Gravelle said government bond purchases deployed during the Covid pandemic could wrap up around the end of next year or the first half of 2025 while the ample reserves policy may keep up to an extra CAD60 billion of settlement balances in the system.

Ample reserves could also be as little as CAD20 billion depending on market conditions, or equal to 1% to 2% of Canada's GDP, Gravelle said, less than the Federal Reserve's longer-run level of reserves estimated at 10% to 13% of U.S. gross domestic product. The Bank of Canada will start buying assets again once the proper level of settlement balances is reached, he said.

"Quantitative tightening is happening, but it will take time to run its course," Gravelle said. His speech also said the central bank is prepared to step in with liquidity if the collapse of SVB and Credit Suisse roil markets, but didn't directly say how that could affect its balance sheet plans.

Most of Gravelle's speech reviewed the effectiveness of the QE program Canada used for the first time in the depths of the pandemic, saying that in future market squeezes its term repo program is the "workhorse" and the role of widespread government bond purchases will likely be limited to calming markets for a specific period of time. Those measures should help reduce any "moral hazard" among investors, Gravelle said, without addressing the accusation from Conservative Party Leader Pierre Poilievre that QE also encouraged reckless deficit spending by Liberal Prime Minister Justin Trudeau. Poilievre has made firing Governor Tiff Macklem-- who largely inherited the QE program from his predecessor-- a signature political pledge.

The Bank deployed CAD210 billion of term repos at the height of the pandemic, and federal bond holdings peaked at CAD440 billion, Gravelle said. He also noted the purpose of the bond purchases shifted from easing market strain to economic stimulus, suggesting that was undesirable. 

"We would be clear from the outset when we are purchasing GoC bonds strictly to restore market functioning," in any future rollout, Gravelle said. "There should be no ambiguity. We would be very clear that the GBPP is targeting market functioning and is distinct from—and not intended as—monetary policy. If we are not crystal clear in our market functioning objective, it could lead to speculation over other monetary policy actions."

"In retrospect, we should have explained the shift in the program’s objective more clearly to the public and market participants. In future times of crisis, we will avoid this issue by clearly distinguishing between asset purchases for market functioning and those for monetary policy," Gravelle said.

Future bond purchases to ease market "dysfunction" would also likely be for a limited time and at "backstop pricing" rather than trying to raise bond prices and lower yields, he said. "Once conditions improved and market functioning returned to normal, we would sell the GoC bonds we had purchased. By selling those bonds soon after market functioning normalized, we would be able to get our balance sheet back to its pre-event size relatively quickly." The Bank may also add other triggers to wind down QE before the set expiry date, he said. 

That stance is a switch from the Bank's current QT policy of holding QE bonds to maturity, rather than begin active sales. 

Stressing again that term repos will likely come before QE in future, Gravelle said there is an existing facility program that would allow the Bank to tackle any situation similar to a recent squeeze at UK pension funds. 

"However, if we were faced with another extreme event that caused severe dysfunction in the GoC bond market—and for which our other emergency tools were not working—we may well be in a “break-the-glass” situation. In this case, we may resort to large-scale GoC bond purchases to restore market functioning," he said.

"QE is something that has only been used once in our history—during the pandemic. In the future, we may once again face a macroeconomic situation where our policy rate is at the effective lower bound. In this type of exceptional circumstance, we may need to use our extended tool kit to provide additional monetary policy stimulus."