Economists see no indication of imminent rate cuts
The Bank of Canada is bringing back an old financial tool it hasn't used in years, hinting it's not ready to ease up on its tight monetary policy, said Bank of Nova Scotia economist Derek Holt.
The central bank announced on Friday its plans to restart the auction of Canadian government cash balances, a tactic it last employed back in August 2020. Some experts see this move as a way to pump more liquidity into the short-term funding markets, essentially giving the central bank leeway to keep up with its strategy of quantitative tightening.
According to Holt, this decision might signal a tougher stance than the market expects. In his words to investors, "Doubling down on QT while relying upon a complex patchwork of funding tools like repo injections and this latest step could be an implicit signal they are nowhere close to easing—if not inclined to tighten further."
The Bank of Canada kicked off its quantitative tightening program in April 2022, halting its purchase of Canadian government bonds and letting its balance sheet contract as existing bonds mature without being replaced. This approach pulls liquidity out of the system.
Recently, there have been signs of strain in short-term funding, evident in the Canadian Overnight Repo Rate Average (Corra), which tracks the cost of overnight borrowing using Canadian government securities as collateral. Ideally, Corra should align closely with the Bank of Canada's benchmark policy rate, which is currently at 5% but has been hovering above this rate for several months.
This discrepancy has sparked discussions about the possibility of the central bank needing to wrap up its QT program sooner than expected.
Last year, BoC governor Tiff Macklem said the bank planned to continue QT as interest rates returned to normal levels, with the program expected to conclude by the end of 2024 or early next year, though no recent updates have been provided.
Reintroducing the cash-auction program could help bring Corra closer to the 5% target, offering "more run-room for QT," according to Taylor Schleich, a rates strategist with the National Bank of Canada.
However, “that’s going to depend on how much the program is used, so it’s hard to say at this point,” she told Bloomberg News in an email.
With Corra reaching a new high of 5.07% on Wednesday before dipping to 5.05% on Friday, market traders are anticipating the Bank of Canada might start cutting rates by July.
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