MNI: BOC Sees Longer Path To Ending QT But Same Endpoint

Bank of Canada Deputy Governor Toni Gravelle on Thursday affirmed plans to slim down the settlement balances on its books, pushing back against investor speculation officials would halt QT early at a bigger level of assets, while saying it would take longer than previously expected to reach its target.

The Bank will keep allowing maturing assets to roll off its balance sheet until so-called settlement balances are reduced to a target range of CAD20 billion to CAD60 billion, from about CAD100 billion now, Gravelle said in the text of a speech to investors in Toronto. That goal is seen being reached sometime in 2025 he said, later than his previous estimate it would happen late this year or in the first half of 2025. The speech linked the delay to a revised assumption about the future level of government deposits at the Bank.

Gravelle disagreed with investors who said that a rise in the Corra rate above the central bank's target was a sign that QT should end early, saying those strains were linked to some short-term arbitrage amid expectations of central bank rate cuts. He also said the Bank's use of some special market operations have eased those strains and the Bank can keep using such operations as needed.

The speech titled "Going back to normal" said that while it's unlikely QT would be paused the main reason for any such move would be an economic slump, something policymakers have downplayed in other recent comments as they focus on risks of stubborn inflation. Gravelle's only comment around interest rates reiterated recent views that "because of the progress that we have made on inflation, our monetary policy discussions have shifted from whether our policy rate is restrictive enough to how long it needs to stay at the current level."

Gravelle didn't totally rule out an early end to QT, saying the Bank would keep reviewing market conditions. RBC and Desjardins have said the Bank may need something like CAD80 billion in the system. 

After QT ends the Bank will return to buying t-bills it erased from its balance sheet during the pandemic, and for some time will focus purchases on short-term assets to re-balance its maturity profile that was drawn out by the purchase of government bonds through QE during the pandemic, Gravelle said. The BOC will also no longer purchase Canada Mortgage Bonds.

More generally officials are debating whether to stick with the practice of buying government debt in the secondary market taken on during the pandemic, or whether to resume the pre-pandemic practice of buying at primary auctions, he said. 

"Before we get to our steady-state balance sheet, there will be a multi-year transition period as we replenish our stock of money market instruments-- t-bills and term repos. So we expect that our purchases will tilt toward shorter-term assets for some time. Once QT ends and we start acquiring assets again, the sequence will likely be term repos at first, then after some time we will add t-bills, with bond purchases coming later still," Gravelle said. 

"After this transition period, our plan is to roughly match floating-rate liabilities with floating-rate assets, so term repos and t-bills. Cash in circulation is assumed to be a permanent liability, so we will continue to roughly match our bond holdings to the size of this liability. As long as our bond holdings are equal to or smaller than our bank note liabilities, the Bank will be protected against losses."

The Bank's balance sheet grew to CAD575 billion from CAD125 billion during the pandemic. While those purchases happened over the space of about a year, the unwind has been much slower. Three years since the Bank’s assets reached their peak it still holds about CAD306 billion of assets, even including some provincial government bonds initially purchased to stabilize markets rather than as part of a full QE program.

Officials haven’t fully explained why they have stuck with allowing maturing assets to roll off the books rather than selling them back into the market, other than saying balance sheet policies should work in the background. This contrasts with the Bank’s aggressive moves to curb inflation by raising interest rates 10 times to the highest in decades. Opposition Conservatives leading in polls ahead of an election due by next year have said the Bank’s balance sheet operations fostered reckless fiscal policy and inflation and complained about the Bank's QE losses. The government had to amend the Bank’s legislation to facilitate the accounting of those unprecedented losses.