These are exceptional losses in the history of the central bank, which has always been profitable. They can be explained by the massive purchases of federal debt to deal with the effects of the pandemic and the rapid rise in interest rates that followed.

The Bank of Canada now has to pay higher interest on the reserves deposited by commercial banks than the interest it receives on its investments, creating a gap between its expenditures and its income.

“Over time, the bank will return to a positive net result,” monetary authorities said in the results released last Friday. The Bank of Canada emphasizes that the loss will not affect its ability to carry out its mission.

The Bank of Canada’s situation is not unique. Most central banks, which intervened massively to support the economy during the pandemic, are now in deficit due to the rate hike.

The US Federal Reserve is also in the red. Between September 2022 and May 2023, the Fed racked up $44 billion in losses in interest received and paid for the same reasons.

Up to 8.8 billion

The Bank of Canada has been posting losses since the third quarter of 2022. At the end of last year, its deficit was $705 million.

The return to profitability will depend on how interest rates develop over the next few years. According to a study by the CD Howe Institute, Canada’s central bank could lose as much as $8.8 billion over the next two to three years^⁠1.

A central bank cannot fail, but this exceptional situation poses communication challenges for monetary authorities, said economist Trevor Tombe, one of the co-authors of the CD Howe study.

Historically, the Bank of Canada’s monopoly on issuing money has always produced profits. Since its inception in 1935, the central bank has returned $160 billion to the Canadian government, CD Howe estimates.

Simultaneously with the rate hike, the Bank of Canada began normalizing its balance sheet and reducing its securities portfolio. Since the beginning of the year, the decline is 13% to 357 billion.