Bank of Canada to End Quantitative Tightening Within Months

The Bank of Canada says it plans to stop shrinking its balance sheet in the first half of this year, making it one of the first major central banks to signal an imminent end to its quantitative tightening program.

Author of the article:

Bloomberg News

Erik Hertzberg

Published Jan 16, 2025  •  3 minute read

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(Bloomberg) — The Bank of Canada says it plans to stop shrinking its balance sheet in the first half of this year, making it one of the first major central banks to signal an imminent end to its quantitative tightening program.

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In a speech in Toronto, Deputy Governor Toni Gravelle said that when the program ends, the bank will start replacing assets via term repo operations, before starting treasury bill purchases in the fourth quarter of this year.

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Toward the end of 2026 at the earliest, the bank expects to start buying bonds in the secondary market. It isn’t anticipating making purchases in primary markets, where government of Canada bonds are issued.

The bank now sees the so-called steady state level of settlement balances to be between C$50 billion and C$70 billion, from the current level of roughly C$130 billion. That’s higher than the C$20 billion to C$60 billion range previously forecast by the bank, Gravelle said in prepared remarks Thursday.

The bank expects settlement balances to fall below this range by September of this year, driven in part by a large bond maturity due around that time, he said.

“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 purchase gradually, and well before September,” Gravelle said, adding that the bank plans to be “transparent about each step.”

It’s the clearest plan the bank has yet outlined for how it expects to finish normalizing and then maintaining its balance sheet, which it’s been shrinking for nearly three years. Settlement balances were as high as C$395 billion during the pandemic, and the bank has since been allowing government bonds it holds to mature, draining liquidity from the financial system.

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“Our aim in steady state is to supply just enough settlement balances to satisfy the demand for them from banks and other Lynx participants,” Gravelle said, referring the country’s wholesale payment system.

Gravelle also stressed that the plan to end QT is unrelated to “recent pressures in repo markets,” referring to the Canadian Overnight Repo Rate Average, known as Corra, which has averaged about 4 basis points higher than the Bank of Canada’s target for the past year.

The bank says the repo pressures are caused primarily by positioning in bond and futures markets and the recent transition to T+1 settlement, and are “not a reflection or indication of broader financial system stress.”

The bank cut its policy rate from 5% to 3.25% between June and December of last year, and policymakers expect yearly inflation to stay around 2% over the next year. After two consecutive half-percentage point cuts and with interest rates restricting economic growth to a lesser degree, officials have signaled a return to a more gradual pace of monetary easing.

Before the speech, traders in overnight swaps put the odds of a quarter percentage-point rate cut at the bank’s next decision Jan. 29 at over three quarters. US President-elect Donald Trump’s tariff threats, and stickier price pressures south of the border have added uncertainty to the Bank of Canada’s interest rate path — markets are pricing a 2.75% terminal rate, above economist expectations.

Gravelle said Canada is set to be among the first major central banks to end QT for three reasons: the bank’s balance sheet was smaller as a proportion of the economy relative to its peers, it ended quantitative easing earlier, and the maturity profile of the bank’s asset holdings was shorter, increasing the pace of normalizing progress.

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