Bank of Canada Has No Plans to Wind Up Quantitative Tightening Earlier Than Planned

By Paul Vieira

OTTAWA--Bank of Canada Gov. Tiff Macklem said Wednesday the central bank is not contemplating plans to end its quantitative-tightening program before the end of the year or early 2025 as previously planned.

Macklem said strains in Canada's overnight lending market witnessed in early 2024 have largely dissipated. The central bank injected liquidity into markets over a dozen times in January, in tranches of 5 billion Canadian dollars, or the equivalent of $3.7 billion, through overnight-repo operations. The injections were necessary because of upward pressure on the overnight collateral rate to above the central bank's policy rate of 5%, Macklem said.

Some market watchers said this was a sign the central bank might need to scale back its quantitative-tightening, or QT, plans, and possibly end the program before a previous timeline of late 2024 or early 2025. Under QT, the central bank is allowing securities to roll off its balance sheet without reinvesting the proceeds.

During the pandemic, the Bank of Canada engaged for the first time in quantitative easing, in which the central bank acquired bonds and other securities to reduce yields on long-term debt, and help stimulate lending. The central bank ended QE in 2021, and QT began in 2022.

Since January, Macklem said the central bank hasn't had to conduct further overnight-repo operations. "That really reflects the fact that [overnight lending] pressure has gone away," he said at a press conference following a fixed-date rate policy decision, in which the Bank of Canada kept its main interest rate steady at 5%.

"We don't think QT was the root cause of these overnight lending pressures. And you shouldn't take this tightness we saw in January as a suggestion or a sign that QT is likely to end earlier than we previously expected," Macklem said.

In a related move, the Bank of Canada last month restarted auctions of Canadian government cash balances. These auctions were suspended during the pandemic, as central bank securities buying, via QE, helped provide sufficient liquidity to markets. Macklem said demand at these auctions "hasn't been super strong."

Senior deputy governor Carolyn Rogers said the early 2024 pressure in overnight markets was attributed to strong demand for longer-term bonds, as traders anticipated rate cuts from global central banks, among them the Bank of Canada, starting as early as March.

"Market participants were purchasing those long bonds on leverage, so the demand for funding was up sharply for a stretch of time," Rogers said. "Our view is that our QT strategy hasn't changed significantly."

Bank of Canada deputy governor Toni Gravelle is scheduled to expand on plans for QT in a Toronto speech set for March 21.

Write to Paul Vieira at [e-mail]

(END) Dow Jones Newswires

03-06-24 1222ET