The Bank of Canada's aggressive interest rate hikes this year have raised the cost of interest charges it pays on settlement balances deposited in the accounts of big banks.
That's while the income the central bank receives from government bonds it holds remains fixed.
The Bank of Canada dramatically expanded its assets during the pandemic as part of its government bond purchasing program. Also known as quantitative easing, the policy was part of the central bank's efforts to stimulate the economy.
That expansion in assets is now costing the central bank, as it paid for the government bonds with the creation of settlement balances.
Speaking before the House of Commons finance committee last week, Bank of Canada governor Tiff Macklem addressed the expected losses.
He said losses don't affect the central bank's ability to conduct monetary policy.
He noted the size and duration of the losses will depend on the path of interest rates and the evolution of the economy.
"Following a period of losses, the Bank of Canada will return to positive net earnings," he said.
The Bank of Canada is looking to the federal government for a solution to balance its books.
While there are a few options available, some economists say the problem before the central bank is largely an accounting one rather than a monetary policy concern.
This report by The Canadian Press was first published Nov. 29, 2022.
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