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.
They are exceptional losses in the history of the central bank, which has always been profitable. This is due to the massive purchases of federal government debt securities made to counter the impact of the pandemic and the rapid rise in interest rates that followed.
The Bank of Canada must now pay higher interest on reserves held by commercial banks than it receives on its investments, creating a gap between its expenditures and income.
“Over time, the bank will return to a positive net result,” the monetary authorities said in results released last Friday. The Bank of Canada maintains that the loss does not impair its ability to fulfill its mandate.
The BoC’s situation is not unique. Most of the central banks that intervened aggressively to support the economy during the pandemic are now running into deficit due to high interest rates.
The US Federal Reserve, among others, is also in the red. Between September 2022 and May 2023, the Fed accumulated losses of $44 billion for the same reasons of matching interest received and paid.
up to 8.8 billion
The Bank of Canada has been recording losses since the third quarter of 2022. At the end of last year, its total deficit amounted to $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 could lose up to $8.8 billion over the next two to three years.1.
Economist Trevor Twomby, one of the co-authors of the C.D. Howe study, said the central bank cannot fail, but that this exceptional situation poses communication challenges for monetary authorities.
Historically, the Bank of Canada’s monopoly on issuing money has always led to profits. Since its creation in 1935, the central bank has returned $160 billion to the Canadian government, estimates C.D. Howe.
At the same time that it raised interest rates, the Bank of Canada began normalizing its balance sheet, reducing its portfolio of securities. Since the beginning of the year, the decline has reached 13%, reaching 357 billion.
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