Central bank prepares gradual asset purchases as it transitions to pre-pandemic operations
The Bank of Canada anticipates concluding its quantitative tightening (QT) process in the first half of 2024, according to deputy governor Toni Gravelle.
BNN Bloomberg reports that this marks a shift back to pre-pandemic asset management practices.
Speaking in Toronto on Thursday at VersaFi, formerly known as Women in Capital Markets, Gravelle detailed the central bank’s transition out of the extraordinary measures introduced during the pandemic.
The Bank of Canada began QT in April 2022 as Canada emerged from the pandemic. The process involved reducing the bank’s balance sheet by allowing bond holdings to mature without replacement.
Gravelle noted that the bank’s reserves have declined significantly, from $395bn during the pandemic to $130bn currently.
The central bank expects to reduce reserves further to a target range of $50bn to $70bn by the third quarter of 2024, a revision from last year’s forecast of $20bn to $60bn.
Gravelle attributed the revised timeline to the maturity of a “very large” federal government bond on September 1, stating, “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.”
He confirmed that the Bank of Canada would restart gradual asset purchases well before September.
Gravelle emphasized that the return to “business as usual” would resemble pre-pandemic asset management practices, rather than operating in stimulus mode.
“When QT ends, we will be back to business as usual for how we manage the balance sheet,” he said.
This will include purchasing assets primarily to offset the growth of currency in circulation.
The portfolio will eventually diversify to include Government of Canada bonds, treasury bills, and term repurchase agreements, similar to its composition before the pandemic.
The bank will first implement term repurchase agreements of one to three months, with treasury bill purchases starting in the fourth quarter of 2025. These purchases will be conducted in small amounts through biweekly Government of Canada debt auctions.
Federal bond purchases, however, will not begin until late 2026. Gravelle pledged transparency, promising to announce plans well in advance.
“When we start buying federal government bonds again in the normal course of business, we will do so in the secondary market, via reverse auctions,” he said.
Gravelle underscored that asset purchases will not serve as economic stimulus, as they did during the pandemic. “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,” he stated.
Additionally, he highlighted the importance of limiting market impacts. “Our bond purchase operations will be price-sensitive, and we won’t necessarily buy everything that dealers offer to us.”
