{"id":43880,"date":"2024-02-16T16:48:05","date_gmt":"2024-02-16T16:48:05","guid":{"rendered":"https:\/\/www.pantheregroup.com\/2024\/02\/16\/quantitative-tightening-and-what-happens-when-bank-of-canada-ends-it\/"},"modified":"2024-02-16T16:48:05","modified_gmt":"2024-02-16T16:48:05","slug":"quantitative-tightening-and-what-happens-when-bank-of-canada-ends-it","status":"publish","type":"post","link":"https:\/\/www.pantheregroup.com\/2024\/02\/16\/quantitative-tightening-and-what-happens-when-bank-of-canada-ends-it\/","title":{"rendered":"Quantitative tightening and what happens when Bank of Canada ends it"},"content":{"rendered":"
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The Bank of Canada could wind down its quantitative tightening program as soon as April and will most likely do so no later than June, an economist at the Royal Bank of Canada predicted in a report this week. The program, through which the central bank reduces assets on its balance sheet, is a form of monetary tightening that works on top of interest rate hikes to curb inflation. Here\u2019s what you need to know about quantitative tightening and what a halt to the program means for the economy.<\/span><\/p>\n<\/div>\n

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During the Great Financial Crisis, central bankers around the world pulled out all the stops to prevent economic collapse. That meant using monetary policy tools that had never before been used at scale, including so-called quantitative easing (QE), through which central banks bought huge quantities of certain kinds of bonds. The purchases essentially increased the quantity of money in circulation and reduced the volume of outstanding bonds, supporting prices. It was a new kind of accommodative monetary policy, but the result was that central banks wound up holding billions worth of assets on their balance sheets. At the peak in February 2021, the Bank of Canada held about $570 billion in assets on its balance sheet. Peak holdings of Government of Canada bonds were about $440 billion.<\/span><\/p>\n

So what is quantitative tightening?<\/b><\/span><\/h2>\n

Quantitative tightening, as the name suggests, is the reverse of this process. Instead of buying up bonds, the central bank sells them \u2014 or lets them run off without replacing them. Whereas quantitative easing encourages spending and investment to stimulate the economy, the goal of quantitative tightening is to help pull back that extraordinary support by reversing the purchases. To that end, quantitative tightening complements the policy interest rate, which influences short-term borrowing costs. It removes a source of downward pressure on interest rates which isn\u2019t needed when the economy is doing well. The Bank of Canada said this helps bring demand and supply back into balance and inflation back toward its two per cent target. In the same way that quantitative easing sends a signal to the public about the bank\u2019s intention to keep its policy interest rate low for an extended period, quantitative tightening indicates that interest rates are likely to rise, it said.<\/span><\/p>\n<\/div>\n

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When did QE turn to QT?<\/b><\/span><\/h2>\n

Canada\u2019s central bank began to formally off-load assets from its balance sheet on April 25, 2022, about one month after its first interest rate hike in March 2022. In remarks last March, Bank of Canada deputy governor Toni Gravelle laid out the expected timeline for the program: \u201cAs for the question of when QT will end, this will likely occur sometime around the end of 2024 or the first half of 2025,\u201d he said. But indicators in short-term funding markets have led analysts to speculate that the move will be accelerated, especially if the bank starts cutting interest rates. Notably, Gravelle also said the bank planned to employ a \u201cfloor system\u201d in which it would keep a relatively small amount of government bonds on its balance sheet going forward \u2014 somewhere in the range of $20 billion to $60 billion.<\/span><\/p>\n

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