The Bank of Canada is poised to bring its quantitative tightening program to an earlier conclusion than previously anticipated, signalling a shift in monetary policy as the country navigates the post-pandemic economic landscape.
Since the onset of the COVID-19 pandemic, the Bank of Canada, led by Governor Tiff Macklem, has embarked on a path of gradually reducing its balance sheet size through quantitative tightening measures.
These measures involved allowing government bonds held by the central bank to mature, effectively draining liquidity from the financial system. Over the course of approximately two years, the central bank’s assets have dwindled from a peak of over $570 billion to around $313 billion.
However, this period of quantitative tightening is nearing its end, according to RBC Capital Markets strategists. Simon Deeley, RBC’s director of Canada rates strategy, suggests that the central bank is likely to adopt a “stable balance sheet policy” following its April 10 rate decision.
This shift in approach entails resuming the purchase of Canadian government bonds to replace those maturing, effectively halting the process of balance sheet reduction.
RBC strategists anticipate that quantitative tightening will conclude around the same time as the central bank’s first rate cut, which they expect to occur in June at the latest.
The timeline for ending quantitative tightening has been expedited due to indicators in short-term funding markets, which have raised concerns among analysts. The Canadian Overnight Repo Rate Average (Corra), a key benchmark, has recently deviated from the Bank of Canada’s target lending rate of five per cent, reaching levels as high as 5.07 per cent. This discrepancy reflects tightening liquidity conditions in the market.
Governor Macklem has attributed this liquidity crunch to increased demand for bonds, driven in part by a global bond rally. Participants in financial markets are rushing to secure higher yields on fixed-income securities ahead of anticipated declines in interest rates, exacerbating pressures on short-term funding markets.
Despite inflation hovering at 3.4 per cent in December, above the Bank of Canada’s target range of one to three per cent, policymakers remain optimistic about a gradual deceleration in inflationary pressures. Macklem and his colleagues anticipate that inflation will continue to trend downward in the coming months.
The Bank of Canada’s decision to halt quantitative tightening earlier than expected reflects a nuanced approach to managing monetary policy amid evolving economic conditions. As policymakers navigate the delicate balance between supporting economic recovery and addressing inflationary concerns, the timing and magnitude of future policy adjustments will be closely scrutinised by market participants and analysts alike.
Contact Accountancy Insurance
We would love to hear from you.
About Accountancy Insurance
Thousands of accounting firms offer our tax audit insurance solution, Audit Shield to their clients. Find out why.