The Bank of Canada’s ability to manage short-term rates came under pressure during the recent quarter-end, with repo trading moving as much as 20 basis points above the policy target, according to Bank of America.
At a press conference this week the central bank downplayed upward pressure on the Canadian Overnight Repo Rate Average, known as CORRA, but market volatility exceeded those expectations. Bank of America observed that the Bank of Canada’s repo operations were not sufficient to fully control short-term rates, suggesting the central bank may need to increase asset purchases to relieve repo market pressure when dealer balance sheets are constrained.
The sensitivity of CORRA to changes in settlement balances is notable. Settlement balances have ranged from C$55 billion to C$85 billion, with a year-to-date average of C$68 billion. The Bank of Canada concluded quantitative tightening in 2025 as settlement balances neared the target range of C$50 billion to C$80 billion. Since ending that program, the central bank has relied on ad hoc overnight repo operations and increased its Treasury bill holdings by C$5 billion to counter further declines in settlement balances.
Over the past year the Bank of Canada has repeatedly executed overnight repo operations when CORRA printed roughly 5 basis points above the policy target. One recent episode from March 24 until April 6 shows how daily operations helped move CORRA down from a peak of 8 basis points above target to about 1 basis point above target.
Despite such interventions, quarter-end conditions proved more challenging. Canadian repo rates traded near 2.4 percent even after central bank action. For quarter-end settlement the Bank of Canada offered C$44 billion of liquidity, but take-up reached only C$33.6 billion. Repo rates remained elevated after an overnight repo operation, a development Bank of America attributes to constraints on dealer balance sheets.
Complicating access to central bank liquidity, Bank of Canada repo operations will not be centrally cleared until early 2027. That timing prevents dealers with constrained balance sheets from utilizing central bank liquidity via central clearing. Bank of America also notes that the current pace of Bank of Canada bill purchases is insufficient to offset the recent declines in settlement balances.
Bottom line: Recent quarter-end repo market dynamics exposed limits in the Bank of Canada’s existing toolkit for controlling short-term rates when settlement balances swing widely and dealer balance sheets are tight.