By Sarah Bell, Michael Chui, Tamara Gomes, Paul Moser-Boehm and Albert Pierres Tejada

Key takeaways

• ♦Rising interest rates are reducing profits or even leading to losses at some central banks, especially those that purchased domestic currency assets for macroeconomic and financial stability objectives.
• ♦Losses and negative equity do not directly affect the ability of central banks to operate effectively.
• ♦In normal times and in crises, central banks should be judged on whether they fulfil their mandates.
• ♦Central banks can underscore their continued ability to achieve policy objectives by clearly explaining the reasons for losses and highlighting the overall benefits of their policy measures.

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Central banks have increasingly deployed their balance sheets in recent decades as a tool to pursue macroeconomic and financial stability objectives in support of their economies. After the Great Financial Crisis (GFC), some advanced economy (AE) central banks used asset purchase programmes (APPs) or other lending programmes to achieve their policy aims. Others introduced such programmes during the Covid19 pandemic (Graph 1.A). These were funded mainly through interest-bearing commercial bank reserves, resulting in a declining share of interest-free liabilities (Graph 1.B). In doing so and to pursue their policy objectives, central banks took financial positions, which influence their profits and losses as a by-product.



When central banks increase interest rates to curb inflation, their net interest income declines, since a large portion of their liabilities is linked to policy rates (Graphs 1.C and 1.D).1 Asset valuations also decline with rising bond yields, putting further pressure on profitability for central banks using an accounting treatment that recognises changes in market values in calculating net profits. Reflecting these dynamics, some central banks have recently reported losses, and more are expected to follow.2 In some cases and depending on accounting approaches, losses are sizeable and can result in negative equity. This bulletin delves further into the drivers behind these developments and explores whether losses might complicate policymaking. While central bank profitability is also influenced by foreign exchange operations and valuations of international reserves (Box 1), the bulletin focuses on central banks with primarily domestic assets (generally AEs).