Funding issues are cropping up in Canada’s money markets again, prompting some analysts to recommend the central bank step in.

The

Canadian Overnight Repo Rate Average

, or Corra, has settled five basis points above the Bank of Canada’s overnight rate for most of September. On a weekly basis, that’s the widest spread since January and if it persists, officials may be forced to intervene again to improve market functioning.

“This issue will continue creeping up unless there is a more permanent fix,” Ian Pollick, global head of fixed income, commodities and currency strategy at Canadian Imperial Bank of Commerce, said in an interview. He expects the central bank to make another change to its deposit rate before the end of the year.

In January, the

Bank of Canada

lowered its deposit rate — the rate it pays commercial banks on deposits of overnight money — to set it at five basis points below the

benchmark overnight rate

. That means the deposit rate is currently 2.7 per cent.

The move was meant to incentivize large institutions that have access to Lynx, the country’s high-value payment system, to use the overnight repurchase agreement market more.

Bank of Canada deputy governor Toni Gravelle explained in February that the change meant firms were no longer getting the same return by leaving the funds with the central bank overnight. That prompted financial firms to offer up their assets — including settlement balances — as collateral in overnight markets, boosting liquidity and putting downward pressure on Corra.

It was seen as a major fix, as Corra finally converged with the overnight rate after being stuck well above the bank’s target for most of 2024.

Before then, policymakers had introduced other tools to fix the distortions in short-term funding markets. Resuming repos at the beginning of 2024 and restarting daily receiver-general auctions on behalf of the government offered only temporary relief.

Last week, the bank conducted a $12 billion repo operation — its first such intervention in months, providing evidence that money-market strains have returned.

“If the problem persists, it would be appropriate for the bank to make adjustments to the deposit rate again,” said Andrew Kelvin, head of Canadian and global rates strategy at Toronto-Dominion Bank.

“If the bank is going to set a target, they should do their best to hit it. At the same time, it hasn’t been persistent enough to warrant an intervention at next week’s meeting,” he added, referring to the central bank’s Sept. 17 rate decision.

At the start of 2025, the Bank of Canada announced it would end quantitative tightening and resume regular purchases of assets to keep a stable level of settlement balances in the financial system, which it sees as between $50 billion and $70 billion.

With the balances just above that range, the continued funding pressures raise questions about how those reserves will ultimately be valued and used by banks, especially when planned central bank purchases of treasury bills and bonds eventually resume. The Bank of Canada expects that to happen roughly within the next year, as a means to manage the size of its balance sheet.

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“Given the market disruptions and pop higher in Corra, we do think the BOC will start bill purchases relatively soon,” Simon Deeley, RBC Capital Markets’ director of macro rates sales, trading and strategy, said in a note. “It could be as soon as the next treasury bill auction on Sept. 23” or early in the fourth quarter, he said.

In January, the central bank said the repo pressures were “not a reflection or indication of broader financial system stress,” but caused by positioning in bond and futures markets and the change to T+1 settlement.

For Pollick, a major issue remains concentration of settlement balances among the country’s largest banks, which he says is throttling the velocity of funding through the financial system.

“The underlying issue with Canadian reserves is there remain ‘have lots’ and ‘have very little,’” he said. “The point of a deposit rate cut is to increase this velocity, even if the underlying distributional problem can’t be solved directly by the central bank.”

Bloomberg.com