BoC to resume ‘business as usual’ this year as it rebuilds its assets

The Bank of Canada says it expects to end its quantitative tightening process in the first half of this year and start purchasing assets again as it moves past the extraordinary measures it took during the pandemic.

In a speech in Toronto on Thursday, deputy governor Toni Gravelle said when that happens, the central bank will return to “business as usual” for how it manages its balance sheet, rather than operating in stimulus mode.

The Bank of Canada began quantitative tightening – a shrinking of its balance sheet – in April of 2022, as the country emerged from the pandemic and the bank no longer needed as big reserves to keep financial markets functioning.

Since then, the central bank has allowed bond holdings to roll off its balance sheet, without replacing them.

“When QT ends, we will be back to business as usual for how we manage the balance sheet,” Gravelle said in prepared remarks for a speech to VersaFi, the organization formerly known as Women in Capital Markets.

“This will look a lot like how we managed it before the pandemic. Essentially, we’ll be purchasing assets mainly to offset the growth of currency in circulation.”

Gravelle said the bank’s reserves currently sit at $130 billion, down from $395 billion during the pandemic.

They expect to reach their target range of $50 to $70 billion to end quantitative tightening in the third quarter of this year – a revised target from the $20 to $60 billion range it forecast last year.

The forecast is based on a “very large” federal government bond coming to maturity on Sept. 1.

“To achieve a smoother glide path for settlement balances as they fall ahead of that large maturity, we will need a transition process where asset purchases help to offset the sharp and sudden drop,” Gravelle said.

“That means we will need to restart our normal-course asset purchases gradually, and well before September.

“Given this timeline, I expect we will be the first major central bank, or among the first, to finish unwinding its pandemic-related (quantitative easing) asset purchases.”

Gravelle said that while its quantitative tightening is almost done, the composition of the bank’s asset holdings won’t be back to normal for some time.

Right now, the Bank of Canada’s portfolio is almost entirely made up of federal government bonds.

“Going forward, we will hold not only (Government of Canada) bonds but also (Government of Canada) treasury bills and term (repurchase agreements), just as we did before the pandemic,” Gravelle said.

“I want to emphasize that we will not be buying assets on an active basis to stimulate the economy like we did during the pandemic.”

Gravelle also laid out rough timeline for how the bank will rebuild its assets.

He said the central bank will begin by term repurchase agreements of one-to-three months, before gradually ramping up.

Next, treasury bill purchases will come in fourth quarter of 2025, “initially with relatively small amounts through each biweekly Government of Canada debt auction,” Gravelle said.

He said federal bond purchases won’t happen until toward the end of 2026, but vowed to announce the timing of their plan well in advance – as part of a renewed commitment to transparency.

“When we start buying federal government bonds again in the normal course of business, we will do so in the secondary market, via reverse auctions,” Gravelle said.

“We want to limit the market impact of our purchase operations. Our bond purchase operations, for example, will be price-sensitive, and we won’t necessarily buy everything that dealers offer to us.”

This report by The Canadian Press was first published Jan. 16, 2025.

Nick Murray, The Canadian Press