Bank of Canada Expects Quantitative Tightening to Wind Up in 2025

Bank of Canada Expects Quantitative Tightening to Wind Up in 2025

In a move that signals cautious optimism for the Canadian economy, the Bank of Canada has projected the cessation of its quantitative tightening measures by 2025. Deputy Governor Toni Gravelle revealed this forecast during a speech that shed light on the central bank’s strategy for managing its balance sheet in the coming years. The announcement marks a significant pivot in the Bank of Canada’s approach to monetary policy, transitioning from the emergency measures adopted during the pandemic to a more stable, growth-oriented stance.

Quantitative Easing Background

The unprecedented global challenge posed by the COVID-19 pandemic led the Bank of Canada to implement quantitative easing (QE) for the first time in its history. This monetary policy tool was designed to combat the economic downturn by indirectly lowering interest rates by purchasing government bonds from financial institutions. The QE program aimed to stimulate spending and investment during heightened uncertainty by increasing the money supply with central bank-generated settlement balances.

Transition to Quantitative Tightening

As the Canadian economy began to recover and stabilize, the central bank shifted its focus towards unwinding the expansive monetary measures introduced during the crisis. This phase, known as quantitative tightening (QT), involves allowing the previously purchased government bonds to mature without renewal. This policy has substantially reduced the settlement balances held by financial institutions from the peak levels seen during the pandemic to approximately $100 billion.

Expected Outcome

Deputy Governor Gravelle outlined the expected path of quantitative tightening, indicating that this phase would conclude once settlement balances reach a target range between $20 billion and $60 billion. The end of QT will signify a return to the Bank of Canada’s standard operational mode, which focuses on maintaining financial stability and supporting economic growth through regular market operations.

Future Operations

Post-quantitative tightening, the Bank of Canada plans to resume its traditional role in the financial system, primarily by purchasing financial assets to reflect the growth in cash circulating within the economy.

This approach allows the central bank to accommodate the increasing demand for banknotes from households and businesses, ensuring sufficient cash for day-to-day transactions. According to Gravelle, the amount of cash in circulation typically expands with the nominal economic growth rate, providing a predictable basis for the bank’s future asset purchases.

Economic Growth and Cash Circulation

The correlation between economic growth and the demand for cash is a critical aspect of the Bank of Canada’s monetary policy framework. As the economy expands, so does the requirement for physical currency, necessitating adjustments in the central bank’s financial asset holdings.

This relationship allows the Bank of Canada to anticipate the future need for cash, even though it does not directly control the pace of economic growth. The central bank aims to ensure stability and confidence in the Canadian monetary system by aligning its operations with these macroeconomic trends.


The Bank of Canada’s announcement regarding the expected timeline for ending quantitative tightening marks a pivotal moment in the country’s economic recovery journey. As the central bank transitions from emergency monetary policies, its focus shifts towards supporting sustainable growth and maintaining financial stability. This strategic approach reflects a commitment to adapting monetary policy tools to meet the evolving needs of the Canadian economy, laying a solid foundation for future prosperity.

The projected wind-up of quantitative tightening by 2025 provides a clear signal of the Bank of Canada’s confidence in the resilience and strength of the Canadian economy. By carefully managing its balance sheet and responding to changing economic conditions, the central bank plays a crucial role in facilitating a stable and conducive environment for growth. As Canada navigates the post-pandemic landscape, the policies and actions of the Bank of Canada will continue to be instrumental in shaping the nation’s economic destiny.