BoC expects quantitative tightening to end in 2025

The Bank of Canada expects quantitative tightening to end sometime in 2025, deputy governor Toni Gravelle said in a speech Thursday about how the central bank plans to manage its balance sheet.

The central bank launched quantitative easing operations for the first time ever during the pandemic – a process that involved buying government bonds from financial institutions using central bank money called settlement balances – to indirectly drive down interest rates.

The central bank is now allowing those bonds to mature without being replaced, which has decreased the value of settlement balances financial institutions hold to about $100 billion.

In a speech in Toronto, Gravelle said the central bank estimates that process, which is called quantitative tightening, will end when settlement balances decline to somewhere between $20 billion and $60 billion.

He said once quantitative tightening ends, the central bank will resume its normal market operations, meaning it will purchase financial assets to reflect growth in cash circulating in the economy.

“Our holdings of financial assets grow passively to reflect the growth of our main balance sheet liability – the cash in your wallets,” said Gravelle, according to the prepared text of his speech released in Ottawa.

“When households and businesses want more bank notes for their day-to-day activities, we accommodate this by creating and circulating more notes via the bank sector.”

Gravelle said the amount of cash in circulation typically grows alongside the rate of nominal economic growth. That allows the Bank of Canada to estimate how much cash will be demanded in the future, he said, even if the central bank doesn’t control that growth.