Bank of Canada
Bank of Canada is expected to finish up its quantitative tightening program as early as April, sooner than officials had previously suggested, according to RBC Capital Markets strategists.
The central bank under Governor Tiff Macklem has been decreasing its balance sheet for approximately two years, eliminating the massive stimulus it supplied during the severe part of the Covid-19 shock. Its holdings have dropped to approximately $313 billion from a record of more than $570 billion as it permits government bonds it owns to mature, draining liquidity from the banking system.
That’s about to stop, however, and policymakers will probably revert to a “stable balance sheet policy” in conjunction with its April 10 rate decision, Simon Deeley, RBC’s head of Canada rates strategy, wrote in a note to investors. That implies it will continue buying Canadian government bonds to replace those coming due.
At the absolute latest, “quantitative tightening ends at a similar time as the first rate cut,” which RBC strategists expect will be in June, Deeley wrote.
Target rate
Bank of Canada Deputy Governor Toni Gravelle indicated last March that policymakers planned to end up quantitative tightening in late 2024 or early 2025. But evidence in short-term funding markets have led experts to believe that the trend would be hastened.
The Bank of Canada conducts monetary policy by setting a target for the overnight lending rate, which has remained at five per cent since policymakers last boosted it in July. Overnight funding in the repo market is meant to hug that target closely.
In recent months, however, the Canadian Overnight Repo Rate Average, known as Corra, has been separated from the Bank of Canada aim. Corra has settled as high as 5.07 per cent as liquidity dries up.
Macklem has claimed demand for bonds is a factor of the liquidity crisis. The global bond rally has strained short-term financing markets because players are racing to lock in higher yields on fixed-income instruments ahead of predicted decreases in interest rates, he told legislators on Feb. 1.
The Bank of Canada has a target of two per cent inflation, within a control zone of one per cent to three per cent. The rate of inflation was 3.4 per cent in December,, but Macklem and other policymakers see it continuing to decelerate.
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