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The Bank of Canada is set to lose billions in the next few years

(OTTAWA) The Bank of Canada could lose up to $8.8 billion over the next few years, according to a new report, which could challenge the central bank’s communications.

The CD Howe Institute document calculates total losses over the next two to three years to be between $3.6 billion and $8.8 billion.

“A lot of what determines the size of the losses actually depends on interest rates over the next two to three years,” said Trevor Twomby, professor of economics at the University of Calgary and co-author of the report.

In the fall, the Bank of Canada posted its first loss in 87-year history, which amounted to 522 million for the third quarter.

The central bank said in its financial report that income from interest on its assets did not keep pace with interest charges on deposits in the bank, which rose amid rising interest rates.

This problem should continue, as interest rates remain high.

Tombi said that the other factor affecting the size of the losses is the size of the deposits of major financial institutions in the central bank.

While the losses do not affect the Bank of Canada’s ability to conduct monetary policy, Tumbi said they do pose a communication challenge for the central bank.

“A lot of people will see this and say, ‘Well, doesn’t that mean the bank is insolvent?'” ” “, He said.

Historically, the Bank of Canada has always made profits, and passes them on to the federal government. According to the report, over the entire history of the bank, those profits totaled about $160 billion in 2021 dollars.

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However, central bank policy decisions during the pandemic led to the current situation.

In response to the economic crisis caused by COVID-19, the Bank of Canada has significantly increased its assets through the Government Bond Purchase Program. This policy, also known as quantitative easing, was part of the central bank’s efforts to stimulate the economy.

This expansion of assets is now costing the central bank, because it has paid for government bonds by creating settlement balances.

With interest rates now higher, the interest charges the central bank pays on these settlement balances has far exceeded the interest it earns on government bonds.

Photo by Jennifer Gauthier, Reuters archives

Tiff Macklem, Governor of the Bank of Canada

I am looking for an accounting solution

Although the losses are a first for the Bank of Canada, other central banks that have also been involved in quantitative easing during the pandemic are also posting losses.

The Bank of Canada is now turning to the federal government to find a solution to balance its books. However, economists note that the solutions are only accounting issues and the losses will inevitably be covered by the government.

Mr Twomby said that while it was just a matter of finding a suitable accounting solution, it was still important because of the central bank’s recent political concern.

He said that “any other potential reputational damage could further erode public confidence in the institution”.

Mr. Tombi and co-authors recommend that the Bank of Canada use a deferred fee, which would allow the central bank to match the losses it is currently incurring against expected future profits.

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So when the Bank of Canada started making money again, it would keep the profits instead of putting them back into the government coffers.

However, this solution requires modification Bank of Canada Actwhich currently does not allow the central bank to retain its earnings.

According to Mr. Twomby, if the law were to change, it would be a good opportunity to prepare the Bank of Canada the next time it might incur losses.

“We must anticipate the possibility that we may find ourselves in a situation like this again,” noted Mr. Twomby. And so this is an opportunity to think about more important reforms Bank of Canada ActTo make sure we’ll be ready next time. »