Governor of the Bank of Canada Tiff Macklem and Carolyn Rogers, Senior Deputy Governor, wait to appear as witnesses before the Senate of Canada Standing Commitee on Banking, Commerce and the Economy, in Ottawa, on April 20.Spencer Colby/The Canadian Press
The Bank of Canada does not expect to resume sending profits to the federal treasury until late 2028 or early 2029, the bank’s second-in-command said Thursday.
In normal times, the central bank sends around $1-billion in profit to federal coffers each year. This stopped last year after the bank reported a third-quarter loss of $522-million – the first time it has lost money in its nine-decade history.
The bank expects to keep losing money over the next two to three years as it works through the after-effects of its pandemic-era bond-buying program. It then will need several more years to recoup these losses, before it starts sending money to the federal government again.
“If you use the current market path for interest rates, we would expect we’re back to zero, and therefore back to remitting our profit to the government somewhere around Q3 2028, or the first part of 2029,” senior deputy governor Carolyn Rogers said in a Senate committee hearing on Thursday. This was the first time a central bank official has laid out a rough timeline for getting back to normal.
The novel situation has forced the federal government to amend the Bank of Canada Act to allow the central bank to retain its earnings and eventually dig its way out of a negative equity position.
“We will fairly quickly make up that loss and get back to a point where we’re at a steady state, which is typically remitting about $1-billion a year to government,” Ms. Rogers said. The timing for this will ultimately depend on what happens to interest rates.
The bank’s losses are a legacy of its quantitative easing (QE) program, which ran for the first 1½ years of the COVID-19 pandemic. This saw the bank buy hundreds of billions of dollars worth of government bonds from market participants, which it paid for by creating interest-bearing deposits for commercial banks, held at the central bank.
The QE program left the central bank with a huge quantity of fixed-rate assets and variable-rate liabilities. As it raised interest rates through 2022 to combat runaway inflation, the bank ended up paying a higher interest rate on its liabilities (commercial bank deposits) than it is earning on its assets (government bonds), resulting in large net-interest losses.
The extent of the losses over the next few years will depend on the trajectory of interest rates. University of Calgary professors Trevor Tombe and Yu Chen estimated in a C.D. Howe Institute paper that losses could range from $3.6-billion to $8.8-billion over the next two to three years.
“We don’t tend to forecast our losses in case it gets interpreted as a forecast of interest rates, but I think the way C.D. Howe laid them out is reasonable,” Ms. Rogers said.
The QE program wasn’t always a money-loser. Before interest rates rose rapidly last year, the central bank was earning outsized profits and remitting them to the government.
“I don’t want to minimize this but in the first part of the pandemic when we were growing our balance sheet rapidly, we remitted an extra $2.6-billion. So there’s a bit of time shifting here,” said Governor Tiff Macklem, who also attended the Senate committee on Thursday.
The central bank is not a profit-seeking organization, and officials say that losses won’t affect the bank’s ability to conduct monetary policy. However, the losses have created a communications challenge and a political headache for the bank.
The central bank is conducting a postmortem on its pandemic-era programs, to see what worked and what did not. Central bank officials have suggested they aren’t keen to launch another bond-buying program.