National Post

BOC faces pressure on balance sheet plans

The Bank of Canada is coming under mounting pressure to accelerate the timeline to end its quantitati­ve tightening program, even as it stays quiet on its plans.

Central bank officials led by governor Tiff Macklem held their key interest rate at five per cent this week, acknowledg­ing that they’re probably done hiking. But policymake­rs gave no substantiv­e updates about their ongoing efforts to shrink the bank’s balance sheet — despite liquidity issues that prompted them to intervene in the repo market at the beginning of this month.

The Bank of Canada, like other central banks, bought huge quantities of bonds during the COVID pandemic, first to stabilize financial markets and then to suppress borrowing costs and help the economy. Its balance sheet grew to more than $570 billion.

It has since declined to around $317 billion as those bonds mature. That process, called quantitati­ve tightening, helps drain cash from the financial system, removing stimulus from the economy.

Last year, the central bank said its expects to wind down its QT program by late 2024 or early 2025. But there’s some evidence it may need to move up that date.

The Canadian overnight repo rate average, or CORRA, has been stuck around five basis points above the Bank of Canada’s overnight-rate target for much of January, spurring the central bank to intervene with a series of repo operations.

CORRA measures the cost of overnight money using Canadian government treasury bills and bonds as collateral for repurchase transactio­ns. It’s supposed to closely track the central bank’s target for the overnight rate. When it doesn’t, it can be a signal that shortterm funding markets aren’t functionin­g as smoothly as they should.

“We were very surprised to not hear Macklem address the strains in repo markets and the potential implicatio­ns for QT,” Taylor Schleich, a rates strategist with National Bank of Canada, said by email after Macklem’s news conference on Wednesday. “At the end of the day, they’re targeting the overnight rate and they’ve been missing their target for a number of months.”

During the bank’s first foray into quantitati­ve easing during the pandemic, it bought government bonds funded in part by the creation of settlement balances — interest-bearing deposits used as a means of payment in Canada’s high-value payment system, called Lynx.

As those bonds have matured and disappeare­d from the asset side of the Bank of Canada’s balance sheet, the central bank has made correspond­ing decreases in its settlement-balance liabilitie­s. That’s effectivel­y reduced liquidity in financial markets.