Do central banks’ losses matter?

Several central banks have started to record financial losses as interest rates normalise rapidly following a decade of unconventional monetary policies and balance sheet expansion. Central banks’ losses are likely to increase further as the gap widens between the interest rate they pay on bank deposits and the return they get on the assets they hold.

Monetary policy has always had a fiscal dimension. Central banks have generated large profits for their governments in the past 12 years. The prospect of financial losses can be seen either as the flip side of this era of monetary activism or the price to pay for previous policy choices.

Central banks cannot ‘run out of money’, and there is no reason for financial losses to impact central banks’ capacity to deliver price stability. But, in some cases, these losses can have real consequences, including an increase in the issuance of government bonds, an incentive to accelerate the reduction of excess liquidity, or changes to the remuneration of bank reserves.

If central banks continue to make large losses for too long, political pressure could mount on them to rebuild their capital, even without financial or legal obligation to do so. This could raise concerns over central banks’ independence, but also their credibility as inflation fighters.