REPORT: Bank Of Canada Likely To Lose Billions Over Next 2-3 Years

In Q3 of last year, the Bank of Canada lost money for the first time in their history. Those losses are set to continue.

According to a new report by the C.D. Howe Institute, the Bank of Canada is set to lose up to $8.8 billion over the next 2-3 years.

The report estimates the BoC will lose between $3.6 billion at the low end, and $8.8 billion at the high end during that timeframe.

Here is a brief rundown of the situation, per the C.D. Howe Institute:

“The Bank of Canada is responding to high inflation by increasing its policy interest rate. With the Bank having recently expanded its balance sheet by buying government bonds and increasing its liabilities to financial institutions, higher policy rates have immediate implications for the Bank of Canada’s own finances.

The bonds were largely purchased from financial institutions, and the proceeds from the sales were overwhelmingly added to the institutions’ deposits, or settlement balances, at the Bank of Canada. This dramatically increased the size of interest-earning deposits at the Bank.

Financial institutions’ deposits at the Bank of Canada earn interest at the deposit rate, which means that rising interest rates increase the Bank’s interest expenses. These expenses now exceed Bank of Canada revenues, and a large financial loss will result – a first in Canadian history. The Bank has always earned a profit since its founding in 1935.

We estimate cumulative losses of between $3.6 billion and $8.8 billion over the next two to three years, depending on the projection scenario. While this does not undermine the Bank’s ability to conduct monetary policy, it does create novel reputational and communications challenges for the Bank at a time of elevated public attention on its activities. It also creates a direct financial cost for the federal government.

Though details of how such losses will be treated are under development, we propose they be (i) subtracted from Bank reserves, or (ii) accumulated within a deferred account; either way, future profits should be used to eventually cover today’s losses. Whichever course is chosen, future amendments to the Bank of Canada Act are almost surely in store.”

According to the report, there will be both financial and reputational challenges as a result, noting that the loss significantly diverges with the prior history of yearly BoC profit:

“Given this history, financial losses at the Bank will negatively affect government finances, likely causing adverse political and public attention. The losses will push the federal deficit modestly higher, requiring the public debt to expand (ceteris paribus), and resulting in marginally higher debt-service costs.”

Bank of Canada already facing criticism

The BoC is already facing a much more difficult political environment than seen in the past.

CPC Leader Pierre Poilievre has said he will replace current BoC Governor Tiff Macklem with someone more focused on getting inflation under control, and the Bank is widely seen as having contributed to both the housing affordability crisis and the broader cost-of-living crisis by dramatically expanding the money supply and enabling large fiscal deficits.

Additionally, the BoC spent years downplaying the possibility of inflation and said interest rates would remain low for quite some time, further weakening their credibility.

As a result, large losses in the next few years will push many Canadians to demand more accountability at the BoC, and likely drive momentum for new leadership and reform of the venerable institution.

Spencer Fernando