Bank of Canada deputy governor Toni Gravelle says the central bank expects quantitative tightening to end sometime in 2025. The Bank of Canada building is shown in Ottawa on Wednesday, Sept. 6, 2023. THE CANADIAN PRESS/Adrian Wyld
The Bank of Canada anticipates the conclusion of quantitative tightening by 2025, stated Deputy Governor Toni Gravelle during a speech on Thursday addressing the central bank's strategies for managing its balance sheet.
In response to the pandemic, the central bank initiated quantitative easing, purchasing government bonds from financial institutions using central bank funds, thereby indirectly lowering interest rates.
Presently, the central bank is allowing these bonds to mature without replacement, resulting in a reduction of settlement balances held by financial institutions to roughly $100 billion.
During a speech delivered in Toronto, Gravelle explained that quantitative tightening, the process of reducing settlement balances, is expected to conclude when these balances decline to a range between $20 billion and $60 billion.
Gravelle emphasized that once quantitative tightening is complete, the central bank will resume its typical market operations, involving the purchase of financial assets to match the growth of cash circulating in the economy.
He elaborated that the central bank's holdings of financial assets expand passively in line with the growth of its main balance sheet liability, namely the cash in circulation.
"When households and businesses require more banknotes for daily transactions, we accommodate this by generating and circulating additional notes through the banking sector," Gravelle explained, according to the released text of his speech in Ottawa.
Gravelle highlighted that the amount of cash in circulation typically aligns with the rate of nominal economic growth, enabling the Bank of Canada to forecast future cash demand, even though it does not directly control this growth.
