Bank of Canada “ready to act” to support market liquidity if needed

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The Bank of Canada stands ready to intervene should the financial system become strained and require additional liquidity.

Bank of Canada Deputy Governor Toni Gravelle made the comment during a speech at the National Bank Financial Services Conference on Wednesday.

“The Bank’s mandate to promote the stability of the financial system means that we’re ready to act in the event of severe market-wide stress and provide liquidity support to the financial system,” he said. “We did so during the 2008–09 global financial crisis, and we did so again during the critical market disruptions that occurred at the outset of the COVID-19 pandemic.”

But in response to a question about the overall health of Canada’s banking system, Gravelle said, “We don’t feel we’re anywhere close to being concerned in terms of financial system stress.”

During his speech, Gravelle said the Canadian banking system has a “well-earned international reputation” for stability, thanks to a combination of the structure of the system and “sound risk management in our financial institutions.”

“Canadian banks weathered the global financial crisis well, and, since then, their resilience has been further strengthened with the implementation of new, higher global standards. But we know we’re not immune to spillovers from what’s happening elsewhere,” he said.

He added that the lessons learned during the Bank’s response to the COVID-19 pandemic will allow the BoC to “further improve and better target our responses in the event of market turmoil in the future.”

Quantitative tightening to end in 2025

Gravelle also touched on the current efforts the Bank is taking to reverse the bond purchases it made during the pandemic, when its holdings of Government of Canada bonds swelled to about $440 billion.

At its peak, the BoC was purchasing up to $5 billion worth of bonds per week, which flooded the market with liquidity and helped keep fixed mortgage rates lower than they otherwise would have been.

That was a period known as Quantitative Easing, which is basically large-scale purchases of financial assets to increase the amount of money in circulation, which in turn helps keep longer-term interest rates lower.

The Bank of Canada is currently in a process of normalizing its balance sheet, known as Quantitative Tightening (QT). Gravelle explained that the Bank will maintain a reserve of balances, which it estimates will be in a range of $20 billion to $60 billion, which works out to 1% to 2% of Canada’s gross domestic product.

“As for the question of when QT will end, this will likely occur sometime around the end of 2024 or the first half of 2025,” Gravelle said.

“It’s important to remember we are still working to bring aggregate supply and demand back into balance,” he added. “Our main tool for doing this is our policy interest rate, which we have increased forcefully—from 0.25% to 4.50% in less than a year. But our balance sheet must continue to normalize to remove the support it provides to monetary policy.”

Featured image by David Kawai/Bloomberg via Getty Images

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