Bank of Canada sets mechanics of liquidity removal

* New operations will help drain liquidity from system

* Aimed at preventing volatile short-term rates

OTTAWA, April 30 (BestGrowthStock) – The Bank of Canada will
introduce a new short-term lending tool for money markets in
coming weeks to help ensure an orderly withdrawal of
extraordinary liquidity introduced during the financial crisis,
the bank said on Friday.

The central bank is gradually discontinuing its emergency
loans to money markets as the economy and financial markets
regain their footing.

It currently holds about C$20 billion worth of securities
that it brought onto its balance sheet through term Purchase
and Resale Agreements (PRAs). Those will mature by mid-July,
completely removing extra liquidity from the money markets by
that time.

To ensure that process goes smoothly and to manage its
balance sheet, the bank will essentially replace the PRAs with
term repos. They are similar to PRAS in that they involve the
central bank buying securities for a term and then reselling
them. However, only government-issued securities can be used as
collateral in the term repo auctions.

The auctions will help avoid disruptive fluctuations in
short-term interest rates, said Mark Chandler, head of Canadian
fixed income and currency strategy at RBC Capital Markets.

“The ultimate goal is to make sure there isn’t too much
volatility in the short term rates,” he said.

The bank will announce the auction date, amount, settlement
and maturity date prior to each operation.

The Bank of Canada last week removed its conditional
commitment to keep its benchmark interest rate at an all-time
low until the end of June, opening the door to a possible first
rate hike on June 1. At the same time, it did not roll-over its
outstanding PRAs and instead will allow them to expire.

Stock Analysis
(Reporting by Louise Egan)

Bank of Canada sets mechanics of liquidity removal