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Bank of Canada sees credit squeeze easing
Globe and Mail January 2008 Update
The Bank of Canada figures that the credit squeeze has eased enough in this country that it does not have to inject any more liquidity into the money markets, at least for the time being – a view one Bay Street economist suggested may be premature.
Even as the U.S. Federal Reserve Board announced plans Friday to pump another $60-billion (U.S.) in short-term loans to its seized-up credit markets before the end of this month, its Canadian counterpart indicated that it does not feel the need to follow suit.
The Bank of Canada issued a statement saying that pressures in the short-term money markets in this country “have eased from their earlier peaks, although spreads have not yet returned to historical levels.”
It added, however, that it “will continue to monitor developments in financial markets and the case for further term operations will be reviewed in light of money market conditions.”
By contrast, the U.S. central bank said it will lend $30-billion (U.S.) in 28-day credit to commercial banks through its so-called term auction facility (TAF) on Jan. 14, and an additional $30-billion at another auction two weeks later.
It also reiterated that it remains on standby for whatever other infusions may become necessary. “The Federal Reserve intends to conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets,” it said in a statement, adding that it will announce decisions about possible auctions next month on Feb. 1.
The announcements came a little more than three weeks after, in a rare public show of co-operation, the Fed, the Bank of Canada, the European Central Bank, the Bank of England and the Swiss central bank announced co-ordinated plans for massive infusions of cheap credit into money markets to tide wary commercial banks over the year-end period.
The ECB pumped in a startling $500-billion and the Fed put up another $20-billion, while the Bank of Canada made an additional $3-billion available.
As losses stemming from the U.S. subprime mortgage debacle last summer mounted into the scores of billions of dollars, the commercial banks have become increasingly reluctant to lend to each other. This has driven ever higher the spread between the interest rates they charge each other and those central banks charge them.
The central bank infusions are designed to bring these rates down by making more funds available.
Douglas Porter, deputy chief economist at Bank of Montreal in Toronto, said that the spread between inter-bank lending rates and central bank benchmark rates has narrowed more in Canada than in the United States over the past several months.
The Canadian dollar three-month inter-bank rate is currently 4.45 per cent, he said, which is 20 basis points higher than the Bank of Canada's overnight lending rate. “That is still wider than normal, but it is not at all unusual,” he said in a telephone interview.
(A basis point is 1/100th of a percentage point.)
By contrast, at 4.62 per cent, the comparable U.S. figure is 37 basis points higher than the Fed Funds Rate, Mr. Porter said. That spread is well down from the 65 basis-point level it held for much of December, but still considerably above the approximately 10 basis-point level it held before the credit crisis erupted.
Still, the BMO economist also questioned whether the Bank of Canada may be a little over-eager in indicating that it currently sees no need for more infusions.
He noted that starting last Sept. 27, just two days after bank Governor David Dodge declared the overnight market was “well on its way back to normal operations,” it was forced to intervene in the market five days in a row.
“We've seen the bank jump the gun before, when they more or less declared something close to an ‘All Clear' last fall, and then the markets tightened again,” Mr. Porter said. “I don't want to accuse them of wishful thinking, but they do seem to be one of the first to get out there and say things are getting back to normal.”
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