Bank of Canada interest rate increase

The government's pandemic response program of quantitative easing did not cause the current surge of inflation, but its impact on public finances will be ...

The Bank of Canada should also commit to eventually returning to its previous corridor system to reduce its footprint in the government bond market. The Bank of Canada is clearly aware of the issue. Should the unelected Bank of Canada have such an impact on the government’s debt profile? But going forward, the Bank should install safeguards around the use of its balance sheet to gobble up government debt. Prior to 2020, every year the Bank of Canada sent around $1 billion to the government of Canada in remittances. By swapping reserves for bonds, the Bank effectively reduces the average maturity of government debt. The problem is that government bonds offer a fixed interest rate, while the interest paid by the Bank on reserves scales with the Bank’s policy rate. Bank notes are now eclipsed on the Bank of Canada’s balance sheet by interest-bearing reserves and reverse repos. But in 2020, the Bank ditched its ingenious zero-reserves “corridor” monetary system, in which commercial banks send funds to each other to manage their liquidity needs, for a “floor” system, in which commercial banks hold reserves at the central bank. Seigniorage is the federal government’s golden goose: the feds receive a steady billion annually in exchange for granting the Bank the privilege of issuing currency. Swapping one type of government debt (government bonds) for another (bank reserves) did not cause the current surge in inflation. We will have a preview of this “QE bomb” on public finances when the Bank reveals it generated a negative net income in 2022 and Ottawa is forced to bail it out.