By Paul Vieira
OTTAWA--The Bank of Canada said it is on pace to become one of the first major central banks to finish reducing excess reserves on its balance sheet accumulated on an emergency basis during the Covid-19 pandemic.
The central bank expects to announce an end to its quantitative-tightening program in the first half of this year, Deputy Gov. Toni Gravelle said, according to prepared remarks he is scheduled to deliver Thursday in Toronto.
Under the program, referred to as QT, the central bank lets securities on its balance sheet roll off at maturity, without using the proceeds to acquire other assets.
"QT is almost finished," said Gravelle. "When QT ends, we will be back to business as usual for how we manage our balance sheet."
Market strategists had expected the central bank to reveal an end to quantitative-tightening in the second quarter, or around the time that the Bank of Canada is likely to bring its policy rate down at or below the neutral rate--or a level that neither stimulates nor contracts growth.
The central bank's reserves, or settlement balances, peaked at around 395 billion Canadian dollars, or the equivalent of US$274 billion, during the pandemic, when officials purchased government bonds and other assets to stabilize financial markets and bring down longer-term rates. Those reserves now sit at about C$130 billion, and Gravelle said the bank expects that level to fall below its preferred C$50 billion to C$70 billion range in the third quarter because of to a significant bond maturity coming due in September.
Settlement balances are interest-bearing deposits belonging to financial-market participants and are held overnight at the central bank, and used to settle large payments between firms. The Bank of Canada allows excess reserves to support day-to-day financial-market transactions, and a source of liquidity in the event of an unexpected shock.
For the first time in its history, the Bank of Canada deployed emergency asset buying, or quantitative easing, during the pandemic. It ended emergency-level asset buying in the fall of 2021, and started quantitative tightening in April 2022.
Gravelle said the central bank would resume buying assets as part of its balance-sheet management, but warned the it would be some time before the composition of its asset holdings would be back to normal.
Once purchases resume, Bank of Canada officials will rebuild its assets through term-repo operations, and then through the acquisition of short-term bills. Gravelle said the central bank doesn't expect a resumption of bond buying until at least late 2026, and those purchases would be on the secondary market. Currently, Canadian government bonds totaling about C$220 billion make up the bulk of the central bank's asset portfolio.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
01-16-25 1258ET
