Bank of Canada Governor Tiff Macklem acknowledged Wednesday that the central bank is on track to lose money for the first time in its history.
Macklem said the Bank of Canada’s net interest income — the difference between interest income on assets and the cost of paying off liabilities — will soon turn negative, if it hasn’t already. He insisted, however, that the dynamics should not shake the central bank’s ability to conduct monetary policy and that its decisions should be guided by its price and financial stability mandates.
“After a period of above-average earnings, our net interest income is now turning negative,” Macklem said in his opening address to the House Finance Committee on Nov. 23. “After a period of losses, the Bank of Canada will return to positive net income. The magnitude and duration of the losses will ultimately depend on a number of factors, including the evolution of interest rates and the evolution of both the economy and the balance sheet.”
Macklem updated the committee on the balance sheet, noting that it peaked at $575 billion in March 2021, and had fallen to $415 billion as of last week — down 28 percent.
When the central bank launched its first foray into quantitative easing (or QE) at the start of the pandemic, it increased the money supply by buying government bonds and other assets in an effort to stimulate the economy and maintain accommodative lending by driving interest rates down. to adjust. almost zero.
During that time, the Bank of Canada had been buying $5 billion worth of bonds a week through the end of 2020 before slowing the pace and stopping altogether in October 2021.
Fast-forward to 2022. The Bank of Canada has raised its key rate six times since March, raising the reference rate from 0.25 percent to 3.75 percent. Higher rates increase the interest payments the Bank of Canada pays on settlements it made to purchase financial assets during its QE campaign.
Most economists say that the central bank’s financial conditions should not cause a significant ripple through the economy and that the institution is not primarily concerned with making money.
The Treasury Department and the Bank of Canada have yet to provide details on how they plan to address the problem, though Macklem said a solution is needed and expects one to come.
Senior Deputy Governor Carolyn Rogers said other central banks are also grappling with this problem and pointed to some possible solutions.
“What (the US Federal Reserve) has done is they will take the negative equity, they will turn it into a deferred asset and then they will reduce that deferred asset over time as the earnings go back to positive” Rogers said.
Other central banks have had their governments set up an indemnity to compensate for the negative equity. “The Bank of Canada currently has compensation, but that compensation covers what we call ‘market losses’. So those losses would occur if we were to sell assets. We don’t intend to.”
Two other options would be to expand the range of compensation or change the legislation in the Bank of Canada Act so that the central bank can keep its revenues to cover losses instead of returning them to the government, it said. they.
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Macklem reiterated that the Bank of Canada’s focus remains on rebalancing price pressures, which the central bank expects to bring back to its two percent target by the end of 2024.
“The Bank of Canada’s job is to ensure that inflation is low, stable and predictable,” said Macklem. “We are still a long way from that target. We believe the risks surrounding our inflation forecast are fairly balanced. But with inflation so far above our target, we are particularly concerned about the upside risks. “
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