Bank of Canada says net loss narrowed to $934 million in first quarter (2024)

The Bank of Canada posted a narrower net loss of $934 million in the first quarter of 2024 as it continued to pay out more in interest on deposits than it received on its bond holdings.

The loss was down from the $1.51-billion shortfall it recorded in the corresponding period last year.

The losses stem in large part from decisions made during the COVID-19 pandemic, including the early decision to stimulate Canada’s severely curtailed economy through quantitative easing by purchasing government bonds.

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As the overnight rate was hiked from 0.25 per cent in the first quarter of 2022 to five per cent in the third quarter of 2023, the central bank has faced higher interest expenses while income received on those government bond holdings remains fixed.

The first net loss in the Bank of Canada’s 87-year history came in the fall of 2022.

“Since the onset of the COVID‑19 pandemic, the Bank (of Canada) has used extraordinary measures to restore the proper functioning of financial markets and support the economic recovery,” the central bank said in Friday’s quarterly financial report.

In response to high inflation following the reopening of the Canadian economy, the policy rate was rapidly raised and the central bank undertook quantitative tightening in which maturing bond holdings are not replaced.

“These losses were the well-foreseen cost of the earlier quantitative easing program, and how it would impact the Bank of Canada once it got far enough along in raising its overnight rate of interest,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

The central bank pays the overnight rate on settlement balances — deposits by banks at the Bank of Canada — so as it raised overnight rates, its interest costs rose, he said. The losses began occurring when the Bank of Canada started paying a higher rate on these balances than it was taking in on fixed-rate bonds purchased under the quantitative easing program.

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“Those losses are now easing because of quantitative tightening, which sees the size of the BOC (Bank of Canada’s) bond portfolio shrinking as these bonds mature, and related to that process, a drop in the amount of deposits at the Bank of Canada on which it pays interest,” Shenfeld said. “Looking ahead, the further shrinkage of those deposits and bond holdings due to quantitative tightening, and cuts in the policy rate of interest, will bring these losses steadily down.”

The central bank recorded net losses of $1.1 billion in 2022 and a nearly $5.7 billion net loss in 2023, but prior to that it had been profitable, remitting $2.4 billion to the federal government in 2021 and nearly $2 billion in 2020.

A C.D. Howe Institute report published in January 2023 said the Bank of Canada has remitted nearly $160 billion to the federal government (in 2021 dollars) over its decades-long history.

“In time, the bank will resume generating net income,” according to the central bank’s quarterly report on Friday. “The net losses do not affect the bank’s ability to carry out its mandate.”

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