In recent remarks, Toni Gravelle, deputy governor of the Bank of Canada (BoC), outlined what’s next for the end of quantitative tightening (QT). Part of the BoC’s decision-making is related to estimating precautionary demand, which is where risk-free and liquid assets, such as Government of Canada (GoC) bonds or settlement balances, are held as a buffer against unexpected funding or liquidity shocks.
Due to the Bank of Canada’s updated assessment of precautionary demand, its team has revised the range upward to between $50 billion and $70 billion from a $20 billion to $60 billion range as the correct measure. Of this, they continue to see about $20 billion to $30 billion being needed to support the payments system. The rest of the range is what they now expect precautionary demand to be.
Currently, there’s some $130 billion in settlement balances, down from a peak of around $395 billion during the pandemic and BoC expects settlement balances to reach its new estimated range around mid-year.
“We expect to announce the end of QT and the associated restart of our business-as-usual asset purchases in the first half of this year,” he said. “When we start growing our assets again for business-as-usual balance sheet management, we will start with term repo operations. These will be 1- and 3- month terms, and we will gradually ramp up the amounts through bi-weekly – 8 – operations.”
He also noted that QT is not ending out of any concern about the functioning of repo markets: “Our assessment is that, for the most part, other factors are causing [recent pressures in repo markets]. I also want to be very clear that the pressures in repo markets are not a reflection or indication of broader financial system stress.”