Understanding

Our next edition of Thought Experiments discussion will be happening on April 13th. Here is a look back at our February discussion where we explored the impact of AI on society and how society can shape how it is integrated.

It was another good session yesterday evening with some interesting questions about federal government borrowing over the pandemic. This slide is from where we took a look at recent year and future near-term forecasted federal government deficits.

The Bank of Canada announced last week that it lost $522 million in the third quarter, the first time its incurred losses in its 87-year history.

How does this happen?

In short, Canada’s central bank is now paying a higher interest rate on deposits than it is earning on the money it has effectively lent out (through the purchase of Government of Canada bonds). As the Globe and Mail reported this week, it is now paying an overnight rate of 3.75% on commercial bank balances while generating a weighted-average yield of 0.65% on government bonds the Bank of Canada bought during the pandemic.

Why did this happen?

This situation is a result of the unique circumstances of Quantitative Easing (or QE), which the Bank of Canada adopted in the early stages of the pandemic, being shortly followed by a rapid rise in interest rates to combat inflation. Quantitative Easing is what led to the significant rise in settlement balances, effectively commercial bank deposits, held by the Bank of Canada.

Do these losses affect federal government finances?

Prior to the pandemic the Bank of Canada, as a Crown Corporation, would typically earn and remit ~$1 billion to the federal government. While Quantitative Easing initially increased this remittance to over ~$2 billion per year, the rapid rise in interest rates has now reversed this. The Bank of Canada is expecting it will lose between $5-$6 billion over the next few years as the conditions continue before returning to positive net interest income in 2024 or 2025.

Is the Bank of Canada the only central bank losing money?

The Bank of Canada isn’t alone as other central banks have also started to report losses. For instance the Reserve Bank of Australia has recorded a $36.7 billion dollar loss.

Some articles and reports that explore the issue are included in the comments below.