The Bank of Canada needs to wrap up its quantitative tightening program or fix distortions in short-term funding markets that are keeping effective interest rates higher, according to Canadian Imperial Bank of Commerce strategists.
Karl Schamotta, chief market strategist of Corpay, joins BNN Bloomberg talks about his thoughts on the expected rate cut next week.
For Canada’s financial institutions, that means settlement balances — interest-bearing deposits used as a means of payment in Canada’s high-value payment system, called Lynx — are disappearing. Their scarcity has led to hoarding, CIBC’s Ian Pollick, Sarah Ying, and Arjun Ananth wrote in a report to investors on Wednesday.
That concentration is a big reason why short-term funding markets aren’t functioning efficiently, and it’s contributing to higher borrowing costs, even as the Bank of Canada has started cutting rates. Otherwise, the Bank of Canada will likely need to keep directly intervening in short-term markets — it did so regularly in January in the form of repo operations to push down borrowing costs. As of 12:30 p.m. in Ottawa on Wednesday, the central bank had conducted $9.2 billion in overnight repo market interventions that day, showing a resurgent need for its involvement.
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