Future asset purchases to target primary and secondary debt markets
The Bank of Canada’s deputy governor has indicated the country’s quantitative tightening (QT) program is slated to conclude in 2025.
This strategic shift comes with plans to pivot towards shorter-duration securities and explore asset purchases across primary and secondary debt markets, reflecting the central bank's adaptive approach to managing the nation's financial stability.
Speaking in Toronto, Gravelle clarified the trajectory of the QT program: "The bottom line is the balance sheet normalization process is continuing as we laid out last year and we have tools to manage any temporary funding pressures that might come up along the way." This reaffirmation highlights the Bank's commitment to its outlined financial strategies amidst evolving economic landscapes.
The decision to extend the QT timeline slightly beyond initial expectations is driven by anticipated changes in government deposits within the central bank's balance sheet, which are expected to keep settlement balances elevated for a longer period. The targeted range for these balances is between $20 billion and $60 billion, a reduction from the present figure of approximately $100 billion.
Looking ahead, the BoC is evaluating the modalities of asset acquisitions, distinguishing future operations from the emergency measures undertaken during the pandemic to stimulate the economy. Gravelle emphasized, "We will start buying government of Canada bonds and other assets again as part of our normal balance sheet management. Those purchases will not be quantitative easing."
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The deputy governor outlined a phased approach to resuming asset purchases, initially focusing on term repos, before incorporating treasury bills and, eventually, bond purchases. This strategy aims to achieve a balanced mix of short and long-term debt in the bank's portfolio.
Addressing concerns over recent funding market pressures, Gravelle reassured that these did not signal an immediate need to halt the QT program. However, he acknowledged the risk of an early conclusion if "persistent upward pressure" on the overnight repo rate necessitates more frequent intervention.
Market analysts, including Ian Pollick of the Canadian Imperial Bank of Commerce, have expressed scepticism about the QT schedule but concur that significant, sustained liquidity issues would be required to precipitate an earlier end to the program.
"The risk of an earlier end to QT is still very high in our view, but it is clear we need to see much more persistent deviations," Pollick commented.
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