Bank of Canada Sees Quick Balance Sheet Runoff Once QT Starts

(Bloomberg) -- Governor Tiff Macklem said the Bank of Canada expects its balance sheet to shrink quickly once it starts the process of running off its bond holdings, in a speech where he sought to reassure Canadians the withdrawal of stimulus will be “deliberate and careful.”

Speaking a day after officials raised their overnight benchmark rate by a quarter of a percentage point to 0.5%, Macklem made the case for why the Bank of Canada has started the process of bringing borrowing costs back to more normal levels.

While the central bank can't do much about global supply chains or rising oil prices, Macklem said policymakers need to worry about inflation expectations drifting higher and making sure demand doesn't get too far ahead of supply now that the economy is at full capacity. Markets are anticipating the benchmark rate will increase to 1% by June, and hit 2% in a year from now.

“The economy is now in a place where moving to a more normal setting for interest rates is appropriate,” Macklem said in prepared remarks of his speech to the CFA Society of Toronto. “The economy can handle it. We know this will be a significant adjustment, and we fully intend to tighten policy in a deliberate and careful way, being mindful of the impacts and monitoring the effects closely.”

Macklem gave additional details on how policymakers plan to reduce the size of the central bank's balance sheet, suggesting that once they start the process they will simply end purchases of federal bonds rather than slowly tapering what they call their reinvestment phase. Currently, the central bank is buying C$4 billion ($3 billion) to C$5 billion worth of Canadian government bonds a month to keep their holdings constant as securities mature.

In their policy statement on Wednesday, central bank officials said they are “considering” when to end the reinvestment phase -- something Macklem repeated in his speech. The Bank of Canada won't outright sell their holdings, he said, but added he expects the balance sheet to “shrink relatively quickly” given its shorter average term to maturity than other banks.

“When we initiate QT, we will stop purchasing Government of Canada bonds,” Macklem said, referring to the start of quantitative tightening. “From that point forward, maturing government bonds will not be replaced when they roll off the balance sheet.”

Macklem didn't provide any guidance on timing for when the roll-off would begin, but noted that it would “complement increases in the policy rate.”

“The Bank's holdings and the maturity schedule of those bonds are published on our website, so the timing and pace of QT will be fully transparent,” Macklem said.