Bank of Canada Announces QT, Reverse of The Program That Boosted Real Estate Prices

Canada’s central bank finally acknowledged inflation is a monetary policy issue. Bank of Canada (BoC) governor Macklem dumped the transitory inflation narrative today. In a speech to Toronto’s CFA Society, he explained rising interest rates are just one monetary policy tool they’ll use going forward. The other is quantitative tightening (QT), a program designed to roll back an experimental tool that helped home prices soar. What the F- is QT, though?

Quantitative Ease

To understand QT, first  you need to understand quantitative ease (QE). QE is a non-conventional monetary tool used to increase inflation when rates are near zero. It involves the central bank buying government bonds on a competitive basis. Since they’re bidding up the price of bonds against investors, yields fall lower and lower. That’s the goal — the state tries to drive the cost of debt down, making it more attractive to borrow. Since credit markets are competitive, this lowers the cost of all borrowing.

Remember, the primary and only goal of QE is to increase inflation. It does this by making debt so cheap the public feels like a sucker for not borrowing money. By stimulating borrowing, they’re stimulating consumption, intentionally faster than supply can keep up. This helps to drive a non-productive increase in price, better known as inflation. In particular, corporate loans and mortgages are the segments they hope to stimulate. 

That’s right. Part of the goal is to drive more (and larger) mortgages, create demand for homes, and raise prices. The BoC even produced research showing low rates drive home prices higher. Just in case you were wondering if they understand this. Just so it’s crystal clear, this is how the BoC explained it to the industry in 2020:

“When the Bank buys government bonds of a given maturity, it bids up their price. This, in turn, lowers the rate of interest that the bond pays to its holders. When the interest rate on government bonds is lower, this transmits itself to other interest rates, such as those on mortgages and corporate loans.”

— Paul Beaudry, Deputy Governor Dec 20, 2020

To reiterate, in 2020 the BoC used QE to create higher inflation. It works by stimulating excess demand, non-productively increasing the price of goods. When it was clear inflation wasn’t transitory, they said it was supply chain problems. Finally, they’re addressing elevated inflation with monetary policy. No one knows where the inflation came from, after they spent billions per month on a program to create inflation. Supply issues, they said. Yeah, sure. Back to QT. 

Quantitative Tightening: It’s Like QE, But In Reverse

Quantitative tightening (QT) is the opposite of the QE program and it lowers inflation. Instead of buying bonds to increase liquidity and lower yields, they do the opposite. The BoC said today they plan on executing this by not replacing the bonds as they mature. This will reduce the state-supplied liquidity for credit markets and increase bond yields.

The desired impact of QT is also the opposite of QE — to reduce inflation and purge monetary excess. Credit gradually tightens, and liquidity is reduced. This brings up the cost of borrowing, improving affordability after an adjustment period. It does this by slowing consumption, and thus price growth. Once again, the opposite of QE. 

Over the next year, a combination of rising rates and QT will reverse elevated inflation. This is good news for everyone but real estate speculators, since it means a healthy economy. No longer is stimulus needed, things are humming on their own, and long term economic value is created.

Canada’s Big Six banks have been advocating for these kinds of moves for a year now. By acting early, they could have addressed the issue early on. Now they’re trying to use a tool never before used in Canada, to tame a 30% high for inflation and record home price growth.

16 Comments

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  • Jake 11 months ago

    We were always told by the government and ” smart economists ” and the press that Canadian Banks are very conservative and have solid economic policies – just like the government.

    Now we are told that they do NOT understand where the inflation came from.

    Nobody understands how the price of homes has gone up so high.

    A Google search shows that Canada’s housing is 300 % of Canadas GDP

    How did all the people in power even allow things to get so out of control ?

    The government sees fit to control the Chicken Growing industry – a simple free market us NOT allowed.

    They do the same for the Dairy industry

    They do the same for the meat industry

    But they do not wish to control the Housing Industry – WHY ?

    Are eggs and Chickens mire important than Housing for all people ?

    Something smells bad ……

    And it’s coming right from the top

    THINK ABOUT THIS ….

    The air, the water, the sun, and the soil is the same in Niagara as it is in Buffalo

    The economy is better in the US

    Why then is a home in Canada TEN times more expensive than in the US

    It’s time we all woke up and smeeled the coffee …..

    • Epiccollision 11 months ago

      You assumptions are your own, don’t blame anyone for your bad conclusions

    • Kim 11 months ago

      QE – QT are not new, only the words are new. It use to be called open market operations to buy or sell government bonds to maintain the overnight rate.
      The new name is part of the wishful and failed theory called Modern Monetary Theory, better known as printing money.

  • Remington 11 months ago

    So they’re pretty much about to collapse the economy.

    • alex 11 months ago

      What other option is there at this point other than a Volker style rug-pull? Our inflation is far worse than our neighbors to the south, regardless of what our heavily adulterated CPI figures read – real estate in particular is calcifying our entire economy and needs to be brought back down to earth lest we leave ourselves open to further economic shocks.

    • Ike 11 months ago

      Finance Minister Freeland said as much. Let’s what the 905 voters say when price of gas hits 2.50 per litre.

      https://www.cbc.ca/news/politics/canada-sanctions-chrystia-freeland-russia-1.6369310

      • Epiccollisionq 11 months ago

        They don’t care, most of them don’t have the daily commute, maybe next year, but now is a nothingburger.

    • Some dude 11 months ago

      Only the 5th time in 20 years, who cares. Are you new to this?

  • Ron Bruce 11 months ago

    Do we think that the Bank of Canada knows what they’re doing? Their weekly changes sound more like a hail-mary pass, with an exceptionally small chance of achieving a target. I hate being on the losing team every week. Put in a new quarterback.

    • AtroubledCanadian 11 months ago

      They certainly seem to think so. Whether it’s hubris, incompetence, or expertise, is yet to be determined.

      Hanging in the balance is all of our livelihoods.

  • Randy Webber 11 months ago

    The gaslighting is real.

    Macklem said: “Quantitative easing together with the other measures we took did lower mortgage rates and that contributed to the strength of the housing market,”

    Then says no link between it? How does Canada have real money? LOL

    https://financialpost.com/news/economy/no-direct-link-between-quantitative-easing-and-mortgages-macklem-tells-finance-committee

  • DWAYNE NEWMAN 11 months ago

    We will see. I have yet to witness the Government doing anything positive for the overall housing markets yet (meaning the last 15 years or so)

  • Mike 11 months ago

    Monetary policy is an age old macroeconomic tool and for the most part an effective one when used properly used, but like all economic principles the main premise is “assuming all factors remain equal” is it?

    The government is either missing the point or skirting the real issue, the problem with housing is even more basic than monetary policy, (fiscal policy they don’t even mention, why? They’ll lose the next election for sure) demand is rising and supply can’t catch up, and alternative supplies (areas outside of the urban areas) are a bitter-pill option because the mass transit system is so anemic that people who live there – cannot get to work (and life events) in a timely and economic fashion. No rocket science here the math is evident. People need a convenient place to live!

    I believe that whatever they do with monetary policy cannot significantly change the demand side economics of housing , that happens to be a bell weather indicator of an economy’s health (that they want to crash?) . This move on the contrary will actually curtail supply side economics because the interest rates will not only rein in and reduce investable funds for housing development but increase development costs due to the higher interest rates. So will housing prices go down – Nope, the basic principles of supply and demand says it will simply overwhelm whatever effect monetary policy adjustments creates.

    People come into Canada from all over the world , and move to where the work is, they will need a place to live, housing unit supply dries up, rentals go up, mortgages go up, disposable income goes down (income tax is the same-what?!) , stagflation creeps in, small businesses fall down like dominoes, etc., the Math is more complicated, but generally no where near good.

    Except for the banks.

    Article also said that he six banks have been pushing for this rate increase for some time – duh! Higher interest rates more mullah for the banks! Makes me wonder whose side the BOC is?

    Can we assume then that “all factors remain equal” not by a long shot .

    My thoughts: The problem is local so just Go local! Incentivize dwelling units build/increase, relax outdated zoning by-laws, incentivize densification of existing space, FSR and footprint and unit limit municipal by law restrictions just do not make sense anymore, AND expand the radius of the “fast” Mass Transit system quickly. So people have the “real” option to live further away from the city and ease the in-city housing demand. (here in Vancouver a 20 minute car drive (in light traffic) to the suburbs is 2+ hours by bus/transit)

    Anything but (Federal) Monetary and Fiscal intervention. Keep the Market Free!

    Anyway….I’ll leave it to the geniuses in Ottawa.

    • Omar 11 months ago

      Got it backwards. Higher interest rates only raise revenue briefly but create long-term contraction of future revenues. This is what’s driving stock values lower for banks since last Jan, when the expectation of higher interest rates were floated as reality.

  • FlipG 11 months ago

    Too Bad Chrystia Freeland has a Degree in Russian History and Russian Literature; instead of Economics.

    What would Dostoevsky do if he was the Minister of Economics? How would Raskalnikov or Mayakovsky react to stop inflation?

    These are the kind of problems we will continue to have when the people in charge are there for all the wrong reasons.

  • Jason Azevedo 11 months ago

    AKA Credit Crunch

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