Global Courant 2023-04-15 05:16:46
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.
Macklem addressed the recent banking stress that erupted in the US last month as he spoke to reporters on Friday from the sidelines of the International Monetary Fund meetings in Washington, D.C.
The collapse of Silicon Valley Bank, followed by other financial institutions, has raised concerns about the implications of rapid rate hikes for financial stability.
But Macklem said central banks won’t back down, noting they are “determined to get inflation back to their inflation targets.”
“Households, businesses, governments need to adapt to higher interest rates, and so does the financial system,” he said.
The governor said adjusting to higher interest rates can be difficult for the financial system, just as it can be difficult for everyone.
Central banks have aggressively raised interest rates over the past year as they act in unison to quell the high inflation that has emerged following the COVID-19 pandemic. However, the rapid rise in interest rates has proved challenging for some financial institutions.
In the case of Silicon Valley Bank, the medium-sized California lender ran into trouble after losing a bet that interest rates would remain low. Instead, interest rates rose – as the US Federal Reserve repeatedly raised its benchmark rate to fight inflation – and the bank’s bond portfolio plummeted in value. When the troubles became public, worried depositors began withdrawing their money in an old-fashioned bank run.
The demise of Silicon Valley Bank was followed two days later by the collapse of New York-based Signature Bank.
Later in March, Swiss authorities pressured UBS to take over its rival after the price of Credit Suisse shares plummeted and savers fled, sparking fears it could fail.
In the Bank of Canada’s quarterly monetary policy report, released Wednesday, the central bank weighed in on recent banking stress, noting that it will contribute to slower global growth as credit conditions tighten.
“Recently, borrowing costs for US banks have risen and there are concerns that conditions could deteriorate further. As a result, some decline in lending is expected, particularly from US regional banks, which play an important role in providing loans to small businesses,” the report said. .
Despite this, Macklem said he disagrees with the idea that price stability and financial stability are at odds and added that achieving both is critical.
“They reinforce each other,” he said.
“Financial stability is a precondition for price stability, and price stability, confidence in the value of money, is fundamental for a stable and well-functioning financial system.”
The governor also noted that the central bank has other tools at its disposal to provide emergency liquidity to the financial system in case of a crisis.
This report from The Canadian Press was first published on April 14, 2023.
– With files from The Associated Press.
