Tariff-fuelled US dollar gains pose global stagflation risks, BIS warns

Good afternoon. Thank you, Tanya, for the kind introduction. And thank you to VersaFi for hosting this event. The Bank of Canada’s balance sheet has been larger than normal for a few years now. That’s because of the role it played during the COVID-19 crisis, in making sure financial markets could work properly and in setting the economy on a path to recovery. As we began to emerge from the worst of the pandemic, we ended quantitative easing (QE) in October 2021. Six months later, in April 2022, we started shrinking the balance sheet through quantitative tightening (QT), a process that continues today. Under QT, we have been letting our bond holdings roll off the balance sheet as they mature, without replacing them. Last year, I said we thought that QT, also known as balance sheet normalization, would end sometime in 2025. Well, it’s 2025. And since I had also promised to deliver any news about QT ahead of time, that is why I am here today. When QT ends, we will be back to business as usual for how we manage the balance sheet. This will look a lot like how we managed it before the pandemic, which I outlined in a speech last March.1 Essentially, we’ll be purchasing assets mainly to offset the growth of currency in circulation—the cash in your wallets. But some things have chaBack to normal for the balance sheet video During the COVID-19 pandemic, the Bank’s balance sheet expanded by a lot. This is because of the emergency measures we took early in the crisis to make sure financial markets continued to function, and then because we used quantitative easing, or QE, to help the economy recover. In April 2022, we started shrinking our balance sheet using a process called quantitative tightening, or QT. Since then, our balance sheet has shrunk by a lot because our settlement balances—or central bank reserves—have declined. Settlement balances are now close to where we want them to be, which is in the range of $50 billion to $70 billion. We need to keep some settlement balances on our balance sheet to satisfy two types of demand: payment system demand—reserves to support day-to-day transactions in Canada’s financial system precautionary demand—reserves that can be used by financial institutions as a buffer against an unexpected shock or sudden need for liquidity Keeping settlement balances in our estimated range will help us implement our monetary policy effectively. It will also help promote a stable and efficient financial system. Demand for settlement balances could change over time as the financial system evolves, so we might change how much we supply. But we’ll be keeping a close eye on precautionary demand. We don’t want banks or other big financial players to rely on reserves too much for their liquidity needs. With settlement balances getting closer t post: BOC'S GRAVELLE: WE WILL NEED TO RESTART OUR NORMAL-COURSE ASSET PURCHASES GRADUALLY, AND WELL BEFORE SEPTEMBER BOC'S GRAVELLE: WE WILL NOT BE ENDING QT OUT OF ANY CONCERN ABOUT FUNCTIONING OF REPO MARKETS; WE THINK OTHER FACTORS ARE CAUSING THESE PRESSURES post: BOC'S GRAVELLE: WHILE QT IS ALMOST FINISHED, THE COMPOSITION OF OUR ASSET HOLDINGS WON'T BE BACK TO NORMAL FOR QUITE SOME TIME BOC'S GRAVELLE: GOC BOND PURCHASES WILL LIKELY NOT START UNTIL TOWARD THE END OF 2026 AT THE EARLIEST BOC'S GRAVELLE: T-BILL PURCHASES WILL TAKE PLACE…