(OTTAWA) Bank of Canada Governor Tiff Macklem says the financial system needs to adjust to higher interest rates, just like the rest of the economy.
Mr. Macklem broached the topic of banking strains that surfaced in the United States last month on Friday at a press conference held on the sidelines of International Monetary Fund (IMF) meetings in Washington, DC.
The collapse of Silicon Valley Bank, followed by those of other financial institutions, raised concerns about the consequences of a rapid rise in interest rates on financial stability.
However, Mr. Macklem stressed that the financial system would have to adjust to higher interest rates and that central banks were “committed to bringing inflation back to its targets.”
“Households, businesses and governments must adjust to higher interest rates, as does the financial system,” he said.
The governor admitted that adjusting to higher interest rates could be difficult for the financial system, just as it could be for Canadians and businesses.
Central banks have raised interest rates aggressively over the past year, acting in concert to rein in the high inflation triggered by the COVID-19 pandemic. However, the rapid rise in interest rates has proved difficult for some financial institutions.
In the case of Silicon Valley Bank, this midsize California lender got into trouble after betting that interest rates would stay low. Instead, interest rates rose — the US Federal Reserve repeatedly raised its benchmark rate to fight inflation — and the value of the bank’s bond portfolio fell. When his problems were made public, worried depositors rushed to the bank to withdraw their money.
The failure of Silicon Valley Bank was followed by that of Signature Bank, New York, two days later.
Later in March, Swiss authorities pushed UBS to take over rival Credit Suisse after the latter’s share price fell and its depositors fled, raising fears of another bankruptcy.
In its quarterly monetary policy report released Wednesday, the Central Bank of Canada commented on recent banking strains, noting that they will contribute to slowing global growth as credit conditions tighten.
“Lately, funding costs for U.S. banks have increased, and some players are concerned that funding conditions could deteriorate further. As a result, some decline in bank lending is expected, especially from U.S. regional banks, which play an important role in extending credit to small businesses,” the report said.
Despite this, Mr. Macklem asserted that he disagreed with the idea that price stability and financial stability are incompatible and clarified that it was essential to achieve these two objectives.
“They reinforce each other,” he said.
“Financial stability is a prerequisite for price stability, and price stability, confidence in the value of money, is essential for the stability and proper functioning of the financial system. »
The governor also pointed out that the central bank has other tools to provide emergency liquidity to the financial system in the event of a crisis.
