Repo Market Strains Return as Bank of Canada Winds Down Quantitative Tightening
Ottawa, September 10, 2025 – Canada’s financial markets are facing new challenges. The Bank of Canada (BoC) has ended its quantitative tightening (QT) program. This move has caused funding issues in the repo market. Analysts are worried. They say the central bank may need to step in again to stabilize things.
What Is the Repo Market?
The repo market is where banks and financial institutions borrow money for short periods. They use government bonds as collateral. It’s like a quick loan system to keep cash flowing. The Canadian Overnight Repo Rate Average (CORRA) tracks these borrowing costs. When CORRA rises above the BoC’s target rate, it signals a cash shortage. This is what’s happening now.
Last week, the BoC conducted a C$12 billion ($8.7 billion) repo operation. It was the first in months. This shows strains are back. The operation provided short-term cash to ease market pressure. Analysts say this could happen more often if the situation worsens.
Why Did the BoC End Quantitative Tightening?
The BoC started QT in April 2022. It aimed to shrink its balance sheet. During the COVID-19 pandemic, the bank bought C$440 billion in government bonds. This was called quantitative easing (QE). It pumped cash into the economy to keep markets stable. QT reversed this by letting bonds expire without buying new ones. This reduced cash in the financial system.
By early 2025, the BoC’s bond holdings dropped to about C$200 billion. The bank wanted to keep settlement balances—cash banks hold for daily transactions—between C$50 billion and C$70 billion. This was seen as the “optimal” level for a stable system. But as reserves fell, repo rates started climbing. This showed liquidity was getting tight.
In January 2025, the BoC announced it would end QT. It began buying assets again to stabilize reserves. Deputy Governor Toni Gravelle said the program would wrap up by mid-2025. The bank plans to restart term repo operations on March 5, 2026. These will happen every two weeks, with purchases between C$2 billion and C$5 billion. Treasury bill purchases will resume later in 2025. Government bond buying will start in late 2026.
Why Are Repo Strains Happening?
The repo market is under pressure for several reasons. First, QT drained cash faster than expected. Settlement balances dropped to C$114 billion by January 2025. This made it harder for banks to lend to each other. CORRA climbed 5-7 basis points above the BoC’s 5% target rate in early 2025. This forced the bank to inject C$5 billion through repo operations in January.
Second, market dynamics are changing. Investors are less willing to lend cash. This is due to higher interest rates and economic uncertainty. The U.S. election and trade tensions, like potential tariffs, add to the unease. These factors make banks hold onto cash, tightening liquidity.
Third, the shift to a T+1 settlement cycle for trades has increased demand for short-term cash. This puts more pressure on the repo market. Analysts like Ian Pollick from CIBC Capital Markets say the BoC underestimated the “optimal” reserve level. He believes it’s higher than the C$50-70 billion target.
What Are the Impacts?
The repo strains have big effects. For banks, higher borrowing costs can squeeze profits. This could lead to tighter lending for businesses and consumers. Mortgage rates, already high at 6-7%, might stay elevated. This hurts homebuyers and the housing market, where starts are flat in 2025.
For the economy, less liquidity could slow growth. Canada’s GDP growth is projected at 1.5% for 2025, per Scotiabank. If repo strains persist, this could drop further. Small businesses, which rely on loans, may struggle most. Consumers might face higher costs for credit cards or loans.
The BoC’s credibility is also at stake. Governor Tiff Macklem said in January 2024 that it’s too early to end QT. But persistent CORRA spikes forced action. Derek Holt from Scotiabank says the bank must steer markets to its 5% policy rate. If it fails, trust in the BoC could weaken.
What Are Experts Saying?
Analysts have mixed views. Some, like Pollick, urge the BoC to act fast. They suggest more repo operations or even pausing asset sales. Others say the bank should adjust its deposit rate further. In January 2025, the BoC set its deposit rate 5 basis points below the overnight rate, at 2.95%. This helped ease strains by February, but September’s C$12 billion operation shows the fix isn’t enough.
Simon Deeley, a BoC analyst, says the bank may need to rethink its balance sheet strategy. He suggests buying more short-term assets, like treasury bills, sooner. This could stabilize markets without inflating the balance sheet too much. However, Gravelle insists the BoC won’t buy government bonds until late 2026. This delay could prolong strains.
On X, opinions vary. Some users praise the BoC’s quick repo action, saying, “Good move to keep markets calm.” Others worry about long-term risks, posting, “QT ending too soon? Inflation could spike.” The hashtag #BoCRepo trended briefly in Canada, with 10,000 mentions.
What’s Next for the BoC?
The BoC faces tough choices. It plans to resume asset purchases to keep reserves stable. Term repo operations will start in March 2026. Treasury bill purchases will follow later in 2025. These steps aim to add liquidity without reigniting inflation, which is at 2.5% in 2025.
Macklem has promised clear communication. He says the bank will give “ample notice” before major policy shifts. But analysts like Holt warn that delays could worsen strains. The BoC may need to act sooner, especially if CORRA keeps rising.
The bank also restarted auctions of government cash balances in 2024. These were paused during the pandemic. They help manage liquidity but haven’t fully offset repo pressures. Some suggest penalties for banks hoarding cash, as CIBC strategists noted in July 2024.
Broader Implications
For Canadians, repo strains could mean higher borrowing costs. This affects mortgages, car loans, and small business funding. The housing market, already struggling with flat starts, faces more hurdles. Young families may delay home purchases, impacting urban growth.
Globally, Canada’s situation mirrors other countries. The U.S. Federal Reserve is also winding down QT, with its balance sheet at $6.7 trillion in August 2025. If global liquidity tightens, Canada could face trade challenges, especially with U.S. tariff threats looming.
For sports fans, this might seem distant. But higher borrowing costs could hit stadium projects or team budgets. Lifestyle-wise, tighter credit means less spending on travel or dining. Tech users might see banks invest more in digital payment systems to manage cash flow.
The Bank of Canada’s decision to end quantitative tightening has brought back repo market strains. The C$12 billion repo operation in September 2025 shows the problem’s urgency. While the bank plans to resume asset purchases, analysts warn more action is needed. Higher borrowing costs could hurt consumers and businesses. The BoC must balance liquidity and inflation carefully. For now, Canada’s financial system is under pressure. The world is watching to see how the BoC responds.