Bank Of Canada Scales Back Liquidity Operations, Warns Of Rising Debt Levels

The Bank of Canada is scaling back several of its emergency liquidity operations, saying they’re no longer required as market function continues to improve.

The central bank will discontinue its banker’s acceptance facility before the end of October and reduce the frequency of its extended-term repo operations to bi-weekly, according to a written statement. The Bank of Canada said it also plans to end the Canada Mortgage Bond Purchase program.

It’s the most significant change to the central bank’s emergency response program since markets began to return to normal in early April. As funding demands wane, the bank had already begun to step back. Holdings under the three programs dropped to about $170 billion from a peak of about $220 billion in June.

At the same time, the Governor of the Bank of Canada sounded a warning about the country’s housing market, saying that the central bank is paying close attention to the housing sector amid a historically low interest rate environment.
"We will watch for signs that housing markets are being driven higher by speculation that prices will keep rising," said Tiff Macklem in a speech Thursday. "And we will watch whether people buying houses are taking on outsized debt relative to their income."

Companies and households have been given a financial lifeline during the Covid-19 pandemic, including deferrals on mortgage payments, a drop in the central bank's key policy rate, and billions in federal aid and credit programs.

But the measures taken over the past six months to keep credit flowing to companies and individuals and reduce economic risk may actually introduce risk in the coming months, said Macklem. In a speech to the Global Risk Institute, he warned of strains on household and business debt that may grow in the coming months.

"As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road," said the Bank of Canada governor.