The Bank of Canada (BoC) is hiking its target for daily settlement balances in a bid to relieve signs of stress in the overnight money market.
“Various indicators of the overnight interest rate have recently been slightly, but persistently, above the bank’s target for the overnight rate, indicating some ongoing frictions in the system,” the BoC reports.
In response, the BoC is increasing the target for the minimum daily level of settlement balances to $500 million from its current level of $150 million, Canada’s central bank announced on Friday.
The move aims to “counter those frictions, and to reinforce the bank’s target for the overnight rate by encouraging market participants to trade overnight balances with each other at levels closer to the target rate,” the BoC states.
The central bank targets positive settlement balances in the overnight market to ease transaction costs and reduce the need for participants to take frequent small advances from the BoC.
The new level will remain in effect until further notice, the BoC says, noting that it will continue to monitor conditions in the overnight market and may adjust the target level of settlement balances further, depending on market conditions.