Bank of Canada sees conditions improve

OTTAWA — The Bank of Canada says financial conditions have improved sufficiently that it can start ending some of the emergency financing programs that helped keep money markets functioning during the height of the credit crunch.

OTTAWA — The Bank of Canada says financial conditions have improved sufficiently that it can start ending some of the emergency financing programs that helped keep money markets functioning during the height of the credit crunch.

The announcement after the close of markets Tuesday does not sound the all clear since the bank is still retaining its main facility allowing the banks access to cash, but it is likely the first step in winding down the extraordinary measures put in place last fall, something bank officials have hinted.

In a statement, the central bank said private sector funding costs have come down considerably and that some of the programs the bank established last fall and winter to inject cash into the system to support loans have not been used of late.

“In this context, the bank … has determined that these facilities be allowed to expire at the end of October,” it said.

On Monday, Finance Minister Jim Flaherty said the average effective interest rate for both households and businesses in Canada have fallen by 200 basis points, or two percentage points, since last fall.

“Improved financial market conditions in recent months have led to a rebound in bond and equity issuances, following several months of retrenchment, while the difference between corporate and government bond rates has narrowed considerably,” he said in addressing a conference on credit.

“As a result … total credit continues to grow in Canada, compared to other economies such as the U.S., where credit growth has slowed dramatically.”

The central bank has hinted for several months it was considering ending some of the programs that have had little take-up in recent months.

However, its popular term purchase and resale agreement, which has seen a drop-off in use in recent months, will remain in effect until at least the end of January 2010.

At the height of the crisis last December, the term PRA made $37 billion in credit available to Canada’s chartered banks. Today, $27 billion remains outstanding.

One instrument being ended at the end of October, which allowed financial players to borrow against non-mortgage assets, including corporate bonds and asset-backed commercial paper, has $1.25 billion outstanding from a peak of $3.26 billion.

A second term loan arrangement had been inactive since January.

The move was not seen as a signal that the Bank of Canada is preparing to exit from a year-long stimulus posture, however.

In its last public statement earlier this month, the bank said it intends to keep its key policy rate at the lowest practical level of 0.25 per cent until at least the third quarter of 2010.

In the statement Tuesday, the bank reiterated that it “ remains committed to providing liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets.”

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