The Bank of Canada (BOC) will soon be allowed to retain some of its earnings to offset financial losses, which could persist for years as the central bank raises rates and reverses its early-pandemic emergency programs, Governor Tiff Macklem said.
The government plans to amend legislation to “allow, on a temporary basis, the Bank of Canada to retain earnings, rather than remit them to the government, for the purpose of covering losses,” Macklem told reporters in a press conference. “We will likely have a period of couple of years of negative net income before our income
reverses back to our normal
Representatives of Finance Minister Chrystia Freeland didn’t immediately respond to requests for comment on the
potential legislative change.
The Bank of Canada in 2020 joined other central banks in starting a range of bond-purchase programs to shore up financial markets as the pandemic prompted investors to dump assets. As inflation picked up in the following years, monetary policy authorities reversed some of those measures and raised interest rates.
For the Bank of Canada, the about-face means it’s now paying more on settlement balances than it’s receiving on its assets.
The Bank of Canada posted a comprehensive loss of C$522 million ($390 million) in the three months ended September 30, 2022, compared with income of C$697 million a year earlier, according to its latest quarterly results.
“This is a good solution,” Macklem said of the potential legislative change. “It will give us all the tools we need.”
Bank of Canada Lifts Key Rate to 4.5%
The Bank of Canada raised interest rates for an eighth consecutive and potentially final time, saying it expects to move to the sidelines and assess the impact of its rapid tightening on the economy.
Policymakers led by Governor Tiff Macklem increased the benchmark overnight lending rate by 25 basis points to 4.5%, the highest level in 15 years. Bonds rallied and the loonie dropped sharply.
While the quarter-percentage-point hike matched expectations of markets and economists, most analysts didn’t see the central bank explicitly declaring a potential end point to rate increases.
Canadian government bond yields and the currency fell as investors digested the central bank’s indication it will hold rates steady.
The loonie dropped as low as C$1.3428 per US dollar after the decision, before paring those losses. The yield on Canada two-year bonds dropped to 3.57% at 2:09 p.m. Ottawa time, down about 8 basis points on the day. Two-year US Treasury yields briefly dipped a couple of basis points after the news.
Inflation is now forecast to slow to 3% by midyear and return to the 2% target in 2024. Officials said falling three-month core measures of inflation may be a signal that underlying price pressures have peaked.
In the quarterly monetary policy report published alongside the decision, officials said the economy is still overheating. But growth is expected to decelerate rapidly. Higher rates are weighing on the real estate market and on household spending, likely helping to cool growth and inflation.
“If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level,” the bank said in the rate statement.
Still, policymakers cautioned that more hikes may be needed if economic data surprise to the upside. The bank “is prepared to increase the policy rate further if needed to return inflation to the 2% target.”