Highlights:
- On household indebtedness, the bank noted growing incomes, slower credit accumulation and improving credit quality have “begun to ease” the vulnerability associated with high household debt.
- On housing, the bank noted the vulnerability associated with housing market imbalances has “shown some signs of lessening” but continues to be elevated.
- Going forward, the FSR will be published once a year in June. Quarterly MPRs will feature more discussion of financial stability risks, and a new “financial system hub” on the BoC’s website will also provide more up-to-date information throughout the year.
Our Take:
Today’s Financial System Review showed a further evolution in the Bank of Canada’s concerns about the health of the financial system. Recall that last November’s FSR was the first in some time that didn’t note an increase in key vulnerabilities related to household debt and housing market imbalances. This time around, the bank noted signs of easing in those vulnerabilities. To be clear, they remain elevated and issues like high household debt will be with us for some time. But the BoC seems to see a turning point over the last year, where new regulations and rising interest rates are starting to improve the risk profile of borrowers and take some heat out of the housing market. As usual the bank is concerned with how these vulnerabilities might amplify the impact of an economic shock. The bank judges that key risks to the economy—from a severe recession, house price correction or sharp increase in interest rates—are little changed, on balance, since last November.
It’s always difficult to draw monetary policy implications from the FSR. We would go back to comments Governor Poloz has made in the past—that with the economy running at full capacity, higher interest rates will help meet the bank’s inflation target while at the same time addressing financial system vulnerabilities. High household debt means they will have to be gradual in raising rates, but the tradeoff between macroeconomic and financial stability risks points to less accommodation being needed. We continue to expect the BoC will raise rates again at their next meeting in July.
