Carney Shuts Door on Liquidity Programs

Governor Mark Carney is closing the door on liquidity programs the Bank of Canada started during the credit crisis, just as the Federal Reserve may expand asset purchases to sustain the U.S. economic recovery.

Canada’s central bank will reduce the relative amount of bonds available to securities dealers at government auctions, reversing steps it took in 2008 and 2009 that aimed to increase market liquidity. All 18 primary dealers that trade with the Fed forecast officials will announce a resumption of U.S. Treasury purchases though so-called quantitative easing when a two-day policy meeting ends tomorrow.

Bond prices may rise in Canada as there will be less supply for private investors to buy, said Michael Gregory, senior economist at Bank of Montreal in Toronto. Demand for Canadian bonds is rising this year, with record purchases by foreign investors on signs the country will eliminate its budget deficit before other Group of Seven nations.

“The auctions may become a little bit tighter because the bank’s taking down a little bit more,” said Gregory. The Bank of Canada announcement “has some impact in that it’s a slightly larger share.”

Bloomberg

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