MNI BRIEF: Highlights of Speech from BOC Deputy Gov Gravelle
MNI (OTTAWA) - Following are highlights from BOC Deputy Governor Toni Gravelle's speech Thursday:
We expect to announce the end of QT and the associated restart of our business-as-usual asset purchases in the first half of this year. When we make that announcement, we will also publish a market notice with more details about the asset acquisition process, including the timing of our initial purchases and expected amounts. 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.
Earlier last year, we thought QT would end when our settlement balances declined to a $20 billion to $60 billion range. This was based on our estimate of Lynx participant demand at the time.
Due to our updated assessment of precautionary demand, we have revised the range (for settlement balances) upward to between $50 billion and $70 billion. Of this, we continue to see about $20 billion to $30 billion being needed to support the payments system. The rest of the range is what we now expect precautionary demand to be.
Currently, we have about $130 billion in settlement balances, down from a peak of around $395 billion during the pandemic.
Based on the maturity profile of our assets, settlement balances are expected to fall well below the $50 billion to $70 billion range in the third quarter, due to a very large GoC bond maturity coming due on September 1, 2025.
To achieve a smoother glide path for settlement balances as they fall ahead of that large maturity, we will need a transition process where asset purchases help to offset the sharp and sudden drop. That means we will need to restart our normal-course asset purchases gradually, and well before September.
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. In managing their liquidity needs, financial market participants should be able to respond to fluctuations in those needs in other ways—for example, through access to markets.
Going forward, our assessment of the optimal range of settlement balances will account for the evolving nature of both payments and the financial system, as well as the need to maintain market discipline.
Currently, our asset portfolio is made up almost entirely of GoC bonds. And as a result, our asset holdings have a maturity profile that skews longer than it did before the pandemic. Going forward, we will hold not only GoC bonds but also GoC treasury bills (t-bills) and term repos, just as we did before the pandemic.
In steady state, we will aim to have the amount of our floating-rate assets, mostly term repos and t-bills, match the amount of our floating-rate liabilities, which include settlement balances. And we will aim to have the size of our bond holdings roughly match currency in circulation, given that currency is assumed to be a permanent liability. Although our asset purchase plan will be designed to ramp up to this steady-state composition, our asset growth is limited by how quickly currency in circulation grows. So we may not reach that composition until around 2030.
I want to emphasize that we will not be buying assets on an active basis to stimulate the economy like we did during the pandemic when we were doing QE. Our normal asset purchases before the pandemic were not QE. And our normal asset purchases after QT ends will not be QE either.
When we start growing our assets again for business-as-usual balance sheet management, we will start with term repo operations. These will be 1- and 3- month terms, and we will gradually ramp up the amounts through bi-weekly - 8 - operations.
T-bill purchases will take place in the primary market. We expect them to resume in the fourth quarter of this year, initially with relatively small amounts through each bi-weekly GoC debt auction.
GoC bond purchases will likely not start until toward the end of 2026—at the earliest. But, as we get closer to purchasing bonds, we will announce the timing well in advance.
When we start buying GoC bonds again in the normal course of business, we will do so in the secondary market, via reverse auctions. Secondary market 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. And there are advantages to doing it this way compared with buying bonds in the primary market—that is, at GoC auctions—which was our practice before the pandemic.