Bank of Canada steps back into the market
Toronto, Sep. 27, 2007
Kuljit Singh, Accredited Mortgage Professional
OTTAWA , September 27, 2007
Globe and Mail Update
HEATHER SCOFFIELD
Just two days after the Bank of Canada said it no longer saw a need to be involved in smoothing the global credit crunch, the central bank has injected almost $1-billion into the market.
Data on the central bank's website show it injected $985-million this morning.
It's the first time in almost a month that the Bank of Canada has injected liquidity.
On Tuesday, Bank of Canada Governor David Dodge indicated that he believed the liquidity problems were over in Canada.
“The overnight market is now well on its way back to normal operations in Canada,” he said in a speech in Vancouver.
“While it is true that many term money market spreads remain abnormally wide, the market is functioning. There have been increasing numbers of transactions in this area and spreads are beginning to narrow. In these circumstances, there does not appear to be anything the Bank of Canada could usefully do to improve the functioning of this market.”
Still, Mr. Dodge has previously promised to inject liquidity as necessary.
This morning's liquidity injection coincides with a press conference in Montreal, in which a committee of investors charged with resolving the standstill of $35-billion in Canadian asset-backed commercial paper announced it would ask for an extension.
The committee had arranged a 60-day standstill, which comes to an end on Oct. 15.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns in Toronto, thinks there may be a link between the central bank's action and the ABCP situation.
“I suspect it is related to concerns about the commercial paper market,” he said. “I think what this shows is that there is still an issue here. The credit markets have not gotten back to normal by any means.”
Not everyone agrees however, and there were no immediate signs of upheaval in markets that would have prompted a bank intervention.
“I don't think there's anything special about it,” said Mark Chandler, fixed income strategist for Royal Bank.
He said the overnight rate is very close to the bank's target.
And he pointed out that before the credit crunch seized global markets in August, the central bank frequently had special operations to inject liquidity. The central bank intervened eight times in June for a total of about $5-billion and 11 times in July for a total of about $7.5-billion, Mr. Chandler said.
Economists said there is no connection whatsoever between the bank's operations and the Canadian dollar trading above par earlier this morning.