MNI:BOC Seen Going To QE Reinvestment Wed, No Future Bond Sale

Canada's central bank is set to hold federal bonds purchased under QE until they mature and keep its balance sheet elevated through the economic recovery, former government officials and advisers told MNI, with Governor Tiff Macklem seen moving to the "reinvestment" phase at the BOC's meeting on Wednesday.

Bond buying should slow from CAD2 billion a week to either CAD1 billion a week or between CAD4 billion and CAD5 billion a month, keeping the balance sheet four times larger than it was before the pandemic, the sources said. Most also saw Macklem sticking to his earlier view about staying in reinvestment mode at least until he raises interest rates, even as some are questioning whether hot inflation could force him to hike ahead of forward guidance for no move before the second half of 2022.

The former officials and advisers surveyed by MNI were in clearest agreement in that the Bank will at no point attempt to sell its holdings of federal government bonds back into the market. Most said it was unlikely or impossible that Macklem would return the balance sheet to normal before the next economic downturn.

"One channel through which QE operates is signaling. Maintaining the balance sheet steady during the recovery signals to market that you will remain accommodative for the foreseeable future," said Dominique Lapointe, former finance department researcher and now senior economist at Laurentian Bank Securities. Treasury bill holdings have also plunged this year, so adding any active bond sales on top of that "would be a lot of products to digest for the market," Lapointe said.

TURNING THE QUEEN MARY

The BOC so far has resisted market bets on a quicker shift to tightening amid a global inflation surge, pointing to a stumble in economic growth and slack in the labor market. At the same time, the BOC avoided the use of QE in 2008 and because of that has less work to do moving holdings back down to the CAD125 billion seen before the pandemic from today's CAD500 billion.

"The bank will hold its balance sheet flat until after the first rate hike, we think that will happen in the second half of next year," said Conference Board chief economist Pedro Antunes, who has advised lawmakers who oversee the central bank.

The Bank will shift to the reinvestment phase next week and the balance sheet will fade as a percentage of GDP over time without further major shifts, said Tony Stillo, Canada director at Oxford Economics and a former forecasting manager at Ontario's finance ministry.

"It's unclear to us and also likely to the Bank whether or not it will actively sell its balance sheet assets," Stillo said. "We don't expect the balance sheet to fall to where it was prior to the pandemic."

Derek Holt at Scotiabank said relying on assets rolling off the books to restore the pre-pandemic balance sheet size "will be like turning the Queen Mary," and "their tightening tools are likely to focus upon rate hikes."