The central bank’s aggressive push to increase interest rates has created a mismatch on its balance sheet. It is now paying a higher interest rate on its liabilities
Experts don’t expect these losses to impact the conduct of monetary policy. Central banks aren’t motivated by profit and they can’t run out of money like a normal corporation.
The main beneficiaries of rising interest payments on Bank of Canada liabilities are Bay Street banks, who are now earning much higher rates on their risk-free deposits at the central bank. Other central banks have already begun reporting losses – both net interest losses and direct losses from selling bonds whose value has dropped as interest rates have risen.
So what changed? Two things: first the size of the bank’s balance sheet, then its benchmark interest rate. However, the calculus changed dramatically as the bank increased its overnight rate to fight inflation. It is now paying an overnight rate of 3.75 per cent on roughly $200-billion worth of settlement balances. Meanwhile, the weighted-average yield of government bonds the bank bought during the pandemic is only 0.65 per cent, according to Mr. Badertscher. That’s a money-losing formula.
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