MNI POLICY: BOC Says Any QE Taper Would Be Gradual, Measured

Bank of Canada Deputy Governor Toni Gravelle said Tuesday any tapering of QE would be done in slow steps, and would not signal any change in the outlook for the policy interest rate to remain at 0.25% until 2023.

Slowing down purchases of at least CAD4 billion a week of federal bonds can be done without removing monetary stimulus, by stabilizing the size of the bond portfolio and re-investing the proceeds of maturing assets, Gravelle said in the text of a speech.

"We would be easing our foot off the accelerator, not hitting the brakes," he said.

"The process for getting there will be gradual and in measured steps," Gravelle said. "The timing of these moderations to the pace of purchases, and the amount of time that we take to get to the reinvestment phase, will be guided by our evolving assessment of the macroeconomic outlook and the strength and durability of the recovery."

Some investors polled by MNI see a taper at the next meeting on April 20, likely to CAD3 billion a week, a view bolstered at the last meeting when policy makers said they could adjust the program as they gain more confidence in a recovery that is already faster than expected. The BOC has said it will maintain the program until the rebound is well underway, and already tapered from CAD5 billion last year while shifting to buy longer-term assets, a move policy makers said was just as stimulative.

"We would arrive at the reinvestment phase of QE some amount of time before we start to increase the policy interest rate," Gravelle said. "Adjusting the pace of QE purchases won't necessarily mean that we have changed our views about when we will need to start raising the policy interest rate."

Gravelle's speech didn't update the BOC's views on the economic rebound, referring to the January quarterly forecast. "As new information on the strength of the recovery arrives, the Governing Council will continue discussions about gradually adjusting the pace of our QE-related purchases," he said.

The BOC also intends to wind down market liquidity programs for repos, provincial and corporate bonds and commercial paper, now that markets have stabilized from last year's dash for cash. Several of the programs were already due to lapse in the next few weeks. The BOC doesn't intend to sell off its corporate or provincial bond holdings worth about CAD17 billion.

The winding down of repo programs in particular will shrink the BOC's balance sheet from CAD575 billion to CAD475 billion by the end of April, Gravelle said.

While the BOC's balance sheet assets are about the same as other major central banks as a percentage of GDP, Gravelle said, its holdings amount to 35% of the federal government bond market, much higher than elsewhere.