In the period of asset purchases and negative interest rates, national central banks (NCBs) did not hedge their interest rate risk but built reserves to address these risks. Admittedly, the current situation is different from anything we have seen in the past as excess liquidity as a result of quantitative easing (QE) and negative interest rates is extremely high.

It is not that banks are suddenly getting remunerated for their deposits at central banks – they always have and there has hardly ever been any speculation about central banks going bankrupt because they only pay interest rates on bank reserves. Some market participants might have forgotten about this, but this new normal has always been the reality. As central banks are moving into a more ‘normal’ world for monetary policy, this also means that bank reserves will again be remunerated at positive interest rates. In Europe, this shift in monetary policy implied a shift from negative interest rates to positive interest rates but still with abundant liquidity. Around the world, central banks have aggressively hiked interest rates in an attempt to tackle record-high inflation and to bring inflation expectations back to where they were at the start of the Covid-19 pandemic.