New speech notes from Deputy Governor Toni Gravelle’s speaking event at the CFA Society in Toronto reveal that the Bank of Canada will not be ending Quantitative Tightening early, as some have suspected.
The Deputy Governor stated that he would like to see settlement balances to land in a “range of $20 billion to $60 billion, whereas right now, we have roughly $100 billion in settlement balances.”
Bank Expects to End QT in Mid-2025
The Deputy Governor expects they will reach their target mid-2025, at which point the central bank can begin to replenish government bonds at maturity.
“The bottom line is the balance sheet normalization process is continuing as we laid out last year, and we have tools to manage any temporary funding pressures that might come up along the way.”
BoC Will No Longer Buy Canada Mortgage Bonds
The Deputy Governor also stated that once bond buying resumes in 2025, the Bank of Canada will no longer buy CMBs; this comes only weeks after the Government of Canada indicated that it would be buying Canada mortgage bonds.
It seems that Government of Canada sees supporting the CMHC as a priority, whereas the Bank of Canada has determined that it is not part of its mandate.
(Remember: the Bank of Canada has a dual mandate to keep inflation low at maximum employment)
Bond Buying Will Be Even Later Than Anticipated
Even worse for mortgage strapped Canadians, the Deputy Governor has indicated that government bonds will be the last thing they purchase in 2025. Bond yields are highly correlated to fixed mortgage rates.
“The sequence will likely be term repos at first, then after some time we will add t-bills, with bond purchases coming later still.”
Higher For Longer
The net result of this announcement is an increased likelihood that mortgage rates will stay higher for longer, because:
- Quantitative tightening puts upward pressure on bond yields (because the Bank of Canada is no longer buying them)
- Bond yields are highly correlated to mortgage rates
- Given that the Bank of Canada will buy long duration bonds (2 year terms or longer) last in 2025, this means that reduced mortgage rates for 2 years or longer terms will be the last to drop.
