OTTAWA, CANADA - SEPTEMBER 9, 2018: Viewed from a street, the original, historic Bank of Canada building stands between the new Bank of Canada glass office towers in downtown Ottawa.“Every year the Bank publishes this Report to offer an assessment of the stability of Canada’s financial system and highlight risks that could threaten that stability,” said Bank of Canada Governor Tiff Macklem at a press conference in Ottawa yesterday.
So, what were the key takeaways? According to Canada’s central bank, despite the trying economic times of late, Canada’s financial system remains resilient. The report’s main message is that the country’s households, businesses, banks, and non-bank financial institutions have been able to proactively adjust to higher interest rates. The much buzzed-about risk of a recession has diminished.
In this climate, Macklem says that Canadian households and businesses continue to adjust to past interest rate increases. He highlights how some indicators of financial stress have risen. Simultaneously, the valuations of some financial assets appear to have become stretched, says Macklem. With that said, among mortgage holders, Rogers says that indicators of financial stress have remained relatively low among this cohort, even as many have been coping with higher mortgage payments. Since the central bank began raising its policy rate in March 2022 – something that would see interest rates climb to 23-year highs – payments have increased for roughly half of all outstanding mortgages.
As Rogers highlighted, higher interest rates are also affecting businesses, by slowing demand for the goods and services that businesses sell, while also increasing their financing costs. With that said, the financial health of large businesses is solid – it’s the country’s smaller businesses that are showing more signs of financial stress.
In the non-bank financial sector, more frequent volatility in financial markets in recent years has led to an increased focus on liquidity risks, said Rogers. “At the same time, some firms are increasingly using leverage, or borrowed money, to fund trading activities,” she said. “This makes them more vulnerable in the event of large market swings.”
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