Bank of Canada Governor Tiff Macklem acknowledged on Wednesday that the central bank is on track lose money for the first time in its history.
Mr Macklem said the Bank of Canada’s net interest income — the difference between interest income on its assets and the cost of repaying its liabilities — would soon become negative, if not already. But this dynamic will not undermine central banks’ ability to conduct monetary policy, he argued, and that decisions will be guided by their mandates on price and financial stability.
“After a string of above-average earnings, we are now seeing negative net interest income,” Mr. Mackrem said in his opening address to the House Finance Committee on Nov. 23. Net income. The size and duration of losses will ultimately depend on many factors, including interest rate paths and the evolution of both the economy and balance sheets. ”
Macklem updated its balance sheet committee, noting that it peaked at $575 billion in March 2021 and fell to $415 billion last week, down 28%.
the central bank First foray into quantitative easing (or QE) was increasing the money supply at the start of the pandemic by buying government bonds and other assets to stimulate the economy and keep borrowing accommodative by driving interest rates to near zero. rice field.
Meanwhile, the Bank of Canada was buying $5 billion worth of bonds a week through the end of 2020, but slowed and stopped completely in October 2021.
Fast forward to 2022. The Bank of Canada has raised its policy rate six times since his March, raising the base rate from 0.25% to 3.75%. Rising interest rates will increase interest payments made by the Bank of Canada on settlements it has created to purchase financial assets during his QE campaign.
Most economists say a central bank’s fiscal position shouldn’t have much of an impact on the economy as a whole, and central banks aren’t meant to make money in the first place.
The Treasury Department and the Bank of Canada have yet to provide details on how they plan to address the issue, but Macklem said a solution is needed and he hopes it will emerge.
Senior Deputy Governor Carolyn Rogers said other central banks are also grappling with the problem and highlighted several potential solutions.
Rogers said, “What[the Federal Reserve Board]did is they took the negative stock, turned it into a deferred asset, and reduced that deferred asset over time as earnings turned positive again. It’s about letting go,” he said.
Other central banks have governments introduce compensation to offset negative capital. “The Bank of Canada is currently indemnifying, but that indemnification covers what we call ‘market losses’. So when you sell your assets you will incur these losses. we have no plans to do that. ”
The other two options are to either expand the scope of compensation or change the Bank of Canada Act legislation so that the central bank can retain profits to cover losses rather than handing them back to the government. It is to be.
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Governor Macklem reiterated that the Bank of Canada’s focus remains disciplined on rebalancing price pressures and that the central bank expects to return to its 2% target by the end of 2024.
“The Bank of Canada’s job is to ensure that inflation is low, stable and predictable,” Mackrem said. We think it’s balanced, but with inflation well above target, the upside risks are of particular concern.”
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