Ottawa –
Bank of Canada Governor Tiff Macklem says the financial system, like any economy, will have to adapt to rising interest rates.
Speaking to reporters from the sidelines at the International Monetary Fund’s conference in Washington, D.C. on Friday, Macklem spoke about the recent banking stress that has wrought in the United States last month.
The failure of other financial institutions following the failure of Silicon Valley Bank has raised concerns about the impact of rapid interest rate hikes on financial stability.
But Macklem said the central bank would not back down and was “determined to bring inflation back to its inflation target.”
“Households, businesses and governments will have to adapt to higher interest rates, and so will the financial system,” he said.
The governor said adapting to rising interest rates can be as difficult for the financial system as it is for everyone else.
Central banks have aggressively raised interest rates last year as they act collectively to crush the high inflation that emerged after the COVID-19 pandemic. However, the rapid rise in interest rates has proven difficult for some financial institutions.
In the case of Silicon Valley Bank, the California-based midsize lender ran into trouble after losing a bet that interest rates would stay low. Instead, interest rates rose and the value of banks’ bond portfolios plummeted as the US Federal Reserve repeatedly raised benchmark interest rates to fight inflation. Once the issue became public, concerned depositors began withdrawing their money in a classic bank run.
Following the collapse of Silicon Valley Bank, a New York-based undersigned bank collapsed two days later.
Swiss authorities pressed UBS to buy a competitor in late March after the price of Credit Suisse shares plummeted and depositors fled.
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 a slowdown in global growth as credit conditions tighten.
“Recently, funding costs for U.S. banks have risen, and there are concerns that the situation could get worse. , and we expect some setback in lending,” the report said. .
Nonetheless, Macklem said he disagrees with the idea that price stability and financial stability are mutually exclusive, adding that it is important to achieve both.
“They reinforce each other,” he said.
“Financial stability is a prerequisite for price stability, and price stability, confidence in the value of money, is the foundation of a stable and well-functioning financial system.”
The governor also noted that central banks have other tools available to provide emergency liquidity to the financial system in the event of a crisis.
This report by the Canadian Press was first published on April 14, 2023.
– With files from the Associated Press.
