March 11, 2008 / 12:55 PM / in 10 years

BoC joins global effort to ease funding strain

OTTAWA (Reuters) - The Bank of Canada will lend a total of C$4 billion ($4 billion) to market players this month and next as part of a global effort by central banks to ease liquidity strains in stressed money markets.

<p>The Governor of the Bank of Canada, Mark Carney, speaks in Vancouver British Columbia, February 18, 2008. REUTERS/Lyle Stafford</p>

The bank, which said Canadian markets were experiencing less pressure than those in other countries, announced it would enter into 28-day term purchase and resale agreements for C$2 billion on March 20 and another C$2 billion on April 3.

The operations will be co-ordinated with separate actions by the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Swiss National Bank.

Canada’s contribution is tiny compared with the Federal Reserve, which will lend up to $200 billion of Treasury securities for 28 days.

But unlike the United States, Canadian participants will have access to Bank of Canada cash rather than bonds.

“You give them your government bonds, or provincial bonds, or a few other products, and you get cold, hard cash in exchange for a length of 28 days,” said Eric Lascelles, chief economics and rates strategist at TD Securities. “So the Canadian one, on a dollar-per-dollar basis, is actually the superior, preferable one,” he said.

“The offset in Canada is that it’s pretty much chump change compared to the U.S. ... Even per-capita, we’re still doing about one-tenth the size,” he said.

Stocks on the Toronto Stock Exchange shot up 1.8 percent, or 236.62 points, at the start of trade to 13,241.71, emboldened by the joint central bank plan. U.S. stocks also soared. In early afternoon trade, the main TSX index was up 0.92 percent, or 119.23 points, at 13,124.32.


That is an encouraging sign, said Paul Ferley, assistant chief economist at RBC Capital Markets.

“We’re seeing a strong reaction in equities markets as a result of getting funds moving out of fixed income,” he said.

In December, central banks from around the world joined forces for the first time since the September 11, 2001, attacks on the United States to help stem a mounting credit crisis.

Bank of Canada spokesman Jeremy Harrison said the Canadian money market was not experiencing the same degree of pressure as other countries. But, while money market funding costs are below those in December, liquidity has not yet returned to historical norms, he added.

“The bank is of the view that it is constructive to address liquidity pressures affecting funding markets in a co-ordinated way,” Harrison told Reuters.

“Pressures in some of these markets have recently increased again,” he said.

The Bank of Canada’s routine injections into money markets have subsided in recent weeks from peak levels last August at the start of the global credit crunch but have not returned to normal.

Although the Bank of Canada is less worried about domestic markets, it is delivering a message that it is prepared to intervene to boost confidence in U.S. subprime mortgage backed securities, which are increasingly shunned by investors.

“They were probably getting reports that very little product was moving and were frustrated by that ... in a lot of cases it was fairly high quality product,” said Ferley.

“It’s more in the U.S. in terms of where the impact is really going to be felt but if you can get a better tone emerging in U.S. financial markets, there is clearly going to be a spillover in a number of non-U.S. markets , including the Canadian market,” he said.

($1=$0.99 Canadian)

Additional reporting by Frank Pingue and John McCrank in Toronto

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