2023-08-28 17:52:16
The Bank of Canada posted a loss of $1.5 billion in the second quarter, bringing its operating deficit to $3 billion since the start of 2023.
These are exceptional losses in the history of the central bank, which has always been profitable. They are explained by the massive purchases of federal government debt securities made to counter the impact of the pandemic and by the rapid rise in interest rates that followed.
The Bank of Canada must now pay higher interest on reserves deposited by commercial banks, higher than the interest it receives on its investments, which creates a gap between its expenses and its income.
“Over time, the bank will return to a positive net result,” monetary authorities said in results released last Friday. The Bank of Canada stresses that the loss does not impair its ability to fulfill its mandate.
The Bank of Canada’s situation is not unique. Most of the central banks that intervened in force to support the economy during the pandemic now find themselves in deficit due to the increase in interest rates.
The US Federal Reserve, among others, is also in the red. Between September 2022 and May 2023, the Fed accumulated losses of US$44 billion for the same reasons of matching interest received and paid.
Up to 8.8 billion
The Bank of Canada has been posting losses since the third quarter of 2022. At the end of last year, its deficit totaled $705 million.
The return to profitability will depend on the evolution of interest rates over the next few years. According to a study by the CD Howe Institute, the Canadian central bank might lose up to 8.8 billion over the next two or three years1.
A central bank cannot fail, but this exceptional situation poses communications challenges for monetary authorities, said economist Trevor Tombe, one of the co-authors of the CD Howe study.
Historically, the Bank of Canada’s monopoly on the issuance of money has always generated profits. Since its creation in 1935, the central bank has returned 160 billion to the Canadian government, estimates the CD Howe.
At the same time as it raised interest rates, the Bank of Canada began to normalize its balance sheet, reducing its securities portfolio. Since the beginning of the year, the decline is 13%, to 357 billion.
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