Governor Tiff Macklem said the Bank of Canada is prepared to end quantitative tightening earlier than planned in the event it needs to stimulate the economy.
(Bloomberg) — Governor Tiff Macklem said the Bank of Canada is prepared to end quantitative tightening earlier than planned in the event it needs to stimulate the economy.
Speaking two days after the central bank held rates steady, Macklem said policymakers plan to allow their balance sheet to shrink as interest rates return to more normal levels. But he warned that if the economy hits a rough patch and rate cuts are needed, officials could temporarily halt their quantitative tightening program.
“If you’re normalizing rates, we’d expect to continue QT. If you’re dropping rates quickly to provide stimulus you’d probably suspend QT and go back into reinvestment,” Macklem said Friday from Washington, where he was attending the spring meetings of the International Monetary Fund and World Bank.
Macklem said his officials discussed hiking rates further during deliberations for this week’s decision, and reiterated that “it is far too early to be thinking about cutting interest rates”.
His comments provide a glimpse into the Bank of Canada’s strategy for shrinking its balance sheet, which ballooned to more than C$570 billion ($427 billion) during the pandemic as it bought swaths of government bonds — first to restore market functioning during the initial Covid shock, and then to provide stimulus for the economy.
The remarks show an acknowledgment among policymakers that their plans could shift if there’s a negative economic shock that requires a loosening of monetary policy.
On Wednesday, Macklem and his governing council said recent data are “reinforcing” their confidence that inflation pressures will abate, but kept the door open to additional hikes. After raising the benchmark overnight rate to 4.5% in January — a 15-year-high — the central banker became the first among his peers to signal a pause.
Swaps traders are now betting the Bank of Canada’s next move will be a cut later this year. The governor pushed back on those expectations in a press conference this week, saying he and his officials discussed the possibility that rates need “to remain restrictive for longer to get inflation all the way back to target.”
In a speech last month, Deputy Governor Toni Gravelle said quantitative tightening will likely end in late 2024 or early 2025. That marked the first time the Bank of Canada put a date on exiting the program.
–With assistance from Brian Platt.
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