TLDR
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On January 29, 2025, the Bank of Canada (BoC) announced the end of Quantitative Tightening.
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Quantitative Tightening (QT) is a monetary policy central banks use to reduce the amount of money circulating in the financial system.
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Ending QT helps the Bank of Canada avoid economic downturns, keep the financial system stable and remain flexible enough to handle future challenges.
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QT is the opposite of QE – or Quantitative Easing – which is a policy used to stimulate the economy, especially during economic slowdowns or financial crises.
On January 29th, 2025, the Bank of Canada (BoC) announced its plan to “complete its balance sheet normalization, ending quantitative tightening.” What does this mean and how does it affect the everyday Canadian? Here’s an explainer on quantitative tightening (QT), its opposing policy quantitative easing (QE), and how these tools are used to stabilize the economy during varying periods of strain and uncertainty.
What is quantitative tightening?
Quantitative tightening, referred to by economists and financial insiders as QT, is when a central bank (i.e. the Bank of Canada or the U.S. Federal Reserve) reduces its balance sheet. In other words, they reduce the amount of assets and liabilities they hold. They do this by either letting the government bonds or securities they hold roll off their balance sheet when they mature (instead of buying new ones) or selling assets outright. Either way, QT reduces the amount of money in circulation in the economy.
Why is quantitative tightening used?
A reasonable question at this point would be, “why”? Well, there are a few reasons why the Bank of Canada would want to bring down the money supply:
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To cool off overheating markets: QT helps to push interest rates higher, which makes borrowing more expensive. When markets grow too quickly, it can lead to financial instability (think housing bubbles or steep stock market fluctuations).
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To control inflation: Inflation tends to rise when there is too much money circulating in the economy.
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To bring the economy back to a ‘business as usual’ position: If there has been extended period of quantitative easing (more on this below), QT can bring monetary policy back to a more normal setting.
What is quantitative easing?
Quantitative easing (QE) is the opposite of quantitative tightening. It’s a tool used to stimulate the economy – during QE, central banks buy long-term government bonds and other assets from financial institutions, injecting money into the financial system. It is most often used during periods of economic slowdown or financial crises. For instance, during the height of the pandemic, the Bank of Canada used quantitative easing to boost the overall money supply and spark economic growth.
Why is quantitative easing used?
Like with quantitative tightening, quantitative easing is used to achieve a certain balance in the economy. It is used to:
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Lower borrowing costs, stimulating lending and spending. It’s typically used when traditional tools (like adjusting the overnight rate) have already been exhausted.
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Prevent a credit crunch: As banks may be hesitant to lend during times of crisis (i.e., the 2008 financial crisis and COVID-19), QE pushes money into the banking system, shoring up confidence and money supply.
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Stimulate inflation: If inflation is too low (which can be harmful to the economy), QE helps raise prices by increasing demand and spending.
Where do we stand now?
The Bank of Canada is ending quantitative tightening to respond to current economic conditions. Here’s how ending QT plays out for Canadians:
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Ending QT can help lower interest rates, making borrowing cheaper
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It could help stabilize home prices and make homeownership more accessible, especially for first-time homebuyers
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Ending QT could help drive economic growth and stabilize the financial system, thanks to cheaper borrowing and better overall financial conditions
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It can position Canada to be more responsive to future economic challenges, such as the U.S. tariffs
The ending of quantitative tightening marks a shift toward a more stable but cautious economic outlook for Canadians. With less pressure on interest rates and financial markets, borrowing costs may ease, offering some relief to consumers and homebuyers. While the outlook is more balanced, ongoing concerns such as the U.S. tariffs and resulting price increases mean there is some uncertainty in the near future. With this latest move, the Bank of Canada is hoping to best position the economy to adjust and adapt.
