Erik Hertzberg
(Bloomberg) – The funding issue has once again emerged in Canada’s money market, prompting some analysts to recommend central banks to step in.
Canada’s overnight repurchase rate average (Corra) has addressed 5 basis points of Canadian banks’ overnight interest rates for most of September. Once a week, the biggest difference since January, and if it persists, officials may be forced to intervene again to improve market function.
“Unless there is a more permanent fix, this problem will continue to spread. He expects the central bank to make another change to its deposit rate by the end of the year,” said Ian Pollick, global head of fixed income, commodity and currency strategy at the Canadian Imperial Commercial Bank in an interview.
In January, the Canadian Bank lowered its deposit rate – it paid commercial banks on deposits in overnight currencies – setting it to 5 basis points below the benchmark overnight rate. This means deposit rates are currently 2.7%.
The move is designed to inspire large institutions with the ability to access the country’s high-value payment system Lynx to make greater use of the overnight repurchase agreement market.
Bank of Canada Deputy Governor Toni Gravelle explained in February that the change means companies no longer get the same returns by putting funds overnight with central banks. This prompts financial companies to provide their assets, including settlement balances, as collateral for overnight markets, increasing liquidity and exerting downward pressure on Corra.
This is seen as a major solution, as Corra finally converges with overnight fees after much of 2024 after well past the bank’s target.
Prior to this, policy makers also introduced other tools to address distortions in the short-term capital market. Restores are restored in early 2024 and rebooting the daily receiver auction on behalf of the government, providing only temporary relief.
Last week, the bank conducted a $12 billion ($8.7 billion) repurchase, the first such intervention in months, providing evidence that the monetary marketing strain has returned.
Toronto – “If the problem persists, it is appropriate for banks to adjust deposit rates again,” said Andrew Kelvin, head of Canadian and global interest rate strategy at Ruler Bank.
He added: “If banks are going to set goals, they should try their best to hit the target. At the same time, it is not enough to intervene at the meeting next week.”
In early 2025, Bank of Canada announced that it would end quantitative tightening and resume regular asset purchases to maintain a stable settlement balance in the financial system, which would be between $50 billion and $70 billion.
The balance is just above that range, and the ongoing financial pressure raises questions about how banks will eventually evaluate and use these reserves, especially when plans to buy treasury bills and bonds are finally restored. Bank of Canada expects this to happen roughly next year as a means of managing the size of the balance sheet.
“Given market disruptions and growing Kura, we do think the BOC will start buying bills,” said Simon Deeley, director of macro sales, trading and strategy at RBC Capital Markets in a note. “This could be at the next Treasury bill auction on September 23 or early in the fourth quarter.”
The central bank said in January that the pressure on buybacks was “not a reflection or sign of pressure on the broader financial system” but was caused by the positioning of bond and futures markets and changes in the T+1 settlement.
For Pollick, a major problem remains the centralized balance between the country’s largest banks, which he says limits the speed of funds in the financial system.
“The fundamental problem with Canadian reserves still exists ‘there are a lot’ and ‘issues,” he said. “Even if the basic allocation problem cannot be solved directly by the central bank, the focus of cutting deposit rates is to increase this speed.”
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Last modified: September 10, 2025
