The central bank, led by Governor Tiff Macklem, has been reducing its balance sheet for about two years, scrapping the ordinary stimulus measures it had provided in the worst phase of the COVID-19 shock. Its assets have fallen to around $313 billion, from a peak of more than $570 billion, as it allows the government bonds it holds to mature, draining liquidity from the monetary system.
However, that is about to end and officials will most likely return to a “stable balance sheet policy” following the April 10 rate decision, Simon Deeley, RBC’s head of Canada rate strategy, said in a note to investors. that it will resume buying Canadian government bonds to update maturing ones.
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.
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Bank of Canada Deputy Governor Toni Gravelle said last March that policymakers expect to end quantitative tightening by the end of 2024 or early 2025, but signals from near-term investment markets have led analysts to speculate that this move will accelerate.
The Bank of Canada conducts its policy by setting a target rate for the overnight rate, which has remained at five cents since policymakers last raised in July. Overnight investment in the repo market is expected to approach that mark.
However, in recent months, Canada’s average overnight repurchase rate, known as CORRA, has deviated from the Bank of Canada’s target. CORRA has stabilized at 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 is targeting 2% inflation, 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 Erik Hertzberg’s.
Bloomberg. com
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