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(Bloomberg) — The Bank of Canada is likely to wrap up its quantitative tightening program as early as April, sooner than policymakers had previously indicated, according to RBC Capital Markets strategists.
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The central bank, led by Governor Tiff Macklem, has been shrinking its balance sheet for about two years, nullifying the ordinary stimulus it had provided in the worst phase of the Covid-19 shock. Its assets have plummeted to around C$313 billion (C$231 billion). ), after peaking at more than C$570 billion, as it allows government bonds it holds to mature, draining liquidity from the monetary system.
That’s about to end, however, and officials will probably return to a “stable balance sheet policy” in conjunction with its April 10 rate decision, Simon Deeley, RBC’s director of Canada rates strategy, said in a note to investors. That means it will resume buying Canadian government bonds to replace those coming due.
At the latest, “quantitative tightening will end at the same time as the first rate cut,” which RBC strategists expect to occur in June, Deeley wrote.
Target Rate
Bank of Canada Deputy Governor Toni Gravelle said last March that policymakers expected to wind up quantitative tightening in late 2024 or early 2025. But indicators in short-term funding markets have led analysts to speculate that the move will be accelerated.
The Bank of Canada conducts its policy by setting a target for the overnight rate, which has been at five per cent consistent with the penny since policymakers last raised it in July. Overnight investment in the repo market is expected to approach that mark.
However, in recent months, Canada’s average overnight repo rate, known as Corra, has deviated from the Bank of Canada’s target. Corra has stabilized to 5. 07% as liquidity dries up.
Macklem said demand for bonds is one cause of the liquidity problem. The global bond rally has put pressure on short-term investment markets as participants rush to earn higher yields on a steady source of income ahead of an expected interest rate cut, he told lawmakers. on February 1st.
The Bank of Canada has an inflation target of 2%, within a control range of 1% to 3%. The inflation rate was 3. 4% in December, but Macklem and other policymakers continue to slow.
–With assistance from Erik Hertzberg.
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