Reversal of Fortunes: Rising Interest Rates and Losses at the Bank of Canada
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 […] Jeremy M. Kronick – Make the Bank of Canada’s Job Easier
From: Jeremy M. Kronick To: Canada’s Governments Date: January 9, 2023 Re: Make the Bank of Canada’s Job Easier When every party understands its role, better public policy ensues. For Canada’s monetary and fiscal authorities, this means central bankers ensure a stable currency value and governments create conditions for strong economic growth. Right now, however, inflation is as high […] In fighting inflation, governments aren’t making the Bank of Canada’s job any easier – Globe and Mail Op-Ed
When everyone understands the role they play, this leads to better public policy. For our monetary and fiscal authorities, this means central bankers ensuring a stable value for the currency they oversee, and governments creating the conditions for strong economic growth.
Unfortunately, we lack that in Canada right now, with inflation as high as it has been in 40 years, and an economy potentially heading toward a recession. The Bank of Canada is working hard to bring down inflation. If governments were indeed boosting the economy’s potential, it would make the bank’s job a heck of a lot easier.
With mandates that target inflation – and ones that target maximum sustainable employment as well, such as that of…
Ambler, Kronick – The Bank of Canada Gets Its Communication Right
From: Steve Ambler and Jeremy M. Kronick To: Bank of Canada Governing Council Date: December 22, 2022 Re: The Bank of Canada Gets Its Communication Right The Bank of Canada’s latest interest rate boost, to 4.25 percent, was unsurprising. The real news was the change in the tone of its announcement. Further tightening will “depend on the data,” […]What’s for Christmas Dinner? Inflation
Inflation is everywhere. Christmas dinner is no exception. Prices rose across the board between October 2020 and 2021 and most festive dinner staples accelerated further one year later to October 2022. Side plates cost more. Bread and butter rose in cost by 17 and 20 percent year-over-year to October 2022. Fresh vegetables and potatoes saw […] Promises, promises: Bank of Canada gets its communications right – Globe and Mail Op-Ed
Last week, the Bank of Canada raised its policy interest rate by 50 basis points, to 4.25 per cent, in line with market expectations of either a 25- or 50-basis-point increase. No surprises there.
The real news was the change in the tone brought by the announcement. Of late, the bank has repeatedly warned Canadians that more rate hikes were coming. Now, further tightening will “depend on the data.”
We think this is a welcome development – and not just because it means the potential end of the tightening cycle, but because the bank gives itself more wiggle room in a very uncertain environment.
More definite statements can be problematic. Back in the second half of 2020, with the overnight rate at its lower bound, the…
Crossed Wires: Does Fiscal and Monetary Policy Coordination Matter?
The onset of the pandemic saw a high degree of coordination between our monetary and fiscal authorities. The Bank of Canada lowered its overnight rate to its effective lower bound and engaged in quantitative easing, governments pumped in stimulus and support programs, and the Office of the Superintendent of Financial Institutions (OSFI) lowered its domestic […] Higher interest rates will cause a recession – how do we pick up the pieces? – Globe and Mail Op-Ed
While many have challenged the pace of the Bank of Canada’s interest-rate hikes, their likelihood of success and the extent to which further increases are merited, it has already become clear that, regardless, a recession is imminent. And while it remains to be seen how deep and how long that recession will be, there is no question it will hurt some more than others.
Will governments be there to pick up the pieces and manage the consequences of higher interest rates? If so, how, and in what ways can they help, given their rather precarious fiscal position, with Ottawa carrying $1.1-trillion in debt?
Among the many things that concern us are the distributional impacts of the looming downturn – some groups are…
C.D. Howe Institute Monetary Policy Council Calls for Bank of Canada to Raise Overnight Rate to 4.00 Percent and Accelerate Reduction in Bond Holdings
December 1, 2022 – The C.D. Howe Institute’s Monetary Policy Council (MPC) recommends that the Bank of Canada raise its target for the overnight rate, its benchmark policy interest rate, by 25 basis points to 4.00 on December 7, and sell some of its holdings of Government of Canada bonds. The Council also recommended that the Bank raise the overnight rate target to 4.25 percent in January 2023, and hold it there through 2023.
The MPC provides an independent assessment of the monetary stance consistent with the Bank of Canada’s 2 percent inflation target. William Robson, the Institute’s CEO, chairs the Council.
Council members make recommendations for the Bank of Canada’s upcoming interest-rate announcement,…
What’s Happening with the Bank of Canada’s Balance Sheet?
When the Bank of Canada buys Government of Canada bonds from commercial banks, it adds them to the asset side of its balance sheet and pays for them by adding to the banks’ deposits (settlement balances) on the liability side of its balance sheet. As a result, the Bank’s balance sheet gets bigger. Amid rising […] The problem of the Bank of Canada’s ballooning balance sheet – Financial Post Op-Ed
The Bank of Canada’s ballooning balance sheet has received lots of attention lately. From $120 billion in early March 2020 it grew over the next 12 months to $575 billion and it still stands at $414 billion today, more than three times what it was. That happened because in response to the pandemic the Bank purchased Government of Canada bonds from commercial banks. It added the bonds to the asset side of its balance sheet and paid for them by boosting “settlement balances” — basically, the commercial banks’ bank accounts with it — on the liability side. Voilà, a ballooned balance sheet.
Three factors suggest the Bank’s larger balance sheet may be with us for a while.
First, although in response to…
The Consequences of the Bank of Canada’s Ballooned Balance Sheet
The Bank of Canada’s balance sheet has undergone a radical transformation since the beginning of the pandemic. The Bank’s total assets more than quadrupled at their peak and still remain 3.5 times higher. The most radical change on the liabilities side has been the increase in settlement balances held by financial institutions at the Bank […]