Bank of Canada faces challenges controlling short-term rates says BofA

Investing.com -- The Bank of Canada's confidence in managing short-term rates was tested this week as repo trading spiked 20 basis points above target during quarter-end, according to Bank of America.

Despite the central bank's dismissal of upward pressure in the Canadian Overnight Repo Rate Average at this week's press conference, volatility exceeded expectations. BoC repo operations proved insufficient to control short-term rates, suggesting the bank may need to increase asset purchases to ease repo pressure when dealer balance sheets are constrained.

CORRA has shown sensitivity to changes in settlement balances, which currently swing between C$55 billion and C$85 billion with a year-to-date average of C$68 billion. The BoC ended quantitative tightening in 2025 when settlement balances approached the target range of C$50 billion to C$80 billion. Since then, the bank has implemented ad hoc repo operations and increased Treasury bill holdings by C$5 billion to offset further declines.

Over the past year, the BoC has frequently implemented overnight repo operations when CORRA prints 5 basis points above the policy target. From March 24 until April 6, daily operations helped bring CORRA down from a peak of 8 basis points above target to 1 basis point.

During quarter-end, Canadian repo rates traded around 2.4% despite BoC intervention. The central bank offered C$44 billion in liquidity for quarter-end settlement, but take-up reached only C$33.6 billion. Repo rates remained elevated even after the overnight repo operation, attributed to dealer balance sheet constraints.

BoC repo operations are not centrally cleared until early 2027, preventing balance sheet-constrained dealers from accessing central bank liquidity. Bank of America notes that BoC bill purchases remain below the pace needed to offset declines in settlement balances.

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