Central bank charts path to normalization

The Bank of Canada plans to halt its quantitative tightening (QT) program in the first half of 2025, becoming one of the first major central banks to signal the conclusion of its balance sheet reduction efforts.
In a speech delivered in Toronto, deputy governor Toni Gravelle outlined the central bank’s roadmap for transitioning to a new phase of monetary operations. Following the cessation of QT, the bank will introduce term repo operations and begin purchasing treasury bills in the fourth quarter of the year, a report from Bloomberg said. By late 2026 at the earliest, it aims to commence bond purchases in secondary markets but does not foresee re-entering primary markets where government bonds are issued.
The bank’s settlement balances, currently at C$130 billion, are expected to decline to C$50 billion–C$70 billion in steady state—a revised estimate from its earlier projection of C$20 billion–C$60 billion. This reduction is anticipated to fall below the target range by September, partly due to a significant bond maturity around that time. Gravelle emphasized the need for a gradual transition to avoid a sudden liquidity drop, stating, “We will need to restart our normal-course asset purchases well before September.”
The announcement marks the clearest plan the Bank of Canada has presented since beginning QT nearly three years ago. Settlement balances, which peaked at C$395 billion during the pandemic, have been reduced as government bonds matured, draining excess liquidity from the financial system.
Gravelle clarified that the end of QT is unrelated to recent pressures in the Canadian Overnight Repo Rate Average (Corra), which has been slightly above the bank’s target rate for the past year. These pressures, he explained, stem from bond and futures market positioning and the transition to a shorter T+1 settlement cycle, rather than broader financial stress.
Canada’s unique circumstances enabled it to expedite its QT program compared to other central banks. Gravelle cited the country’s smaller balance sheet relative to GDP, an earlier end to quantitative easing, and a shorter asset maturity profile as key factors.
The Bank of Canada’s current monetary policy has also drawn attention. After cutting the policy interest rate from 5% to 3.25% in the second half of 2024, officials anticipate inflation to stabilize at 2% through 2025. However, uncertainty persists, driven by tariff threats from the US and inflationary pressures south of the border, Bloomberg highlighted.
The next interest rate decision on January 29 carries high expectations of a 0.25% rate cut, according to traders in overnight swaps. Markets are currently pricing a terminal rate of 2.75%, slightly above economist forecasts.
As Gravelle emphasized, the bank’s ultimate goal is to ensure sufficient liquidity in the financial system while maintaining transparency throughout the transition process. “Our aim in steady state is to supply just enough settlement balances to satisfy demand from banks and other Lynx participants,” he said, referring the country’s wholesale payment system.
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