Musalem: How Should the Promise of Higher Productivity Growth Change the Reality of Monetary Policy Today?

Good morning. Deputy Governor Toni Gravelle and I are pleased to be here to discuss the Bank of Canada’s Financial Stability Report, or FSR. A stable and efficient financial ...

Canada’s financial system has continued to function well despite US tariffs and trade uncertainty. But a more turbulent global environment poses risks to financial stability, particularly if several vulnerabilities crystalize at the same time. The Canadian financial system continues to be resilient. Households and businesses remain in stable financial condition, and banks have strengthened their capacity to absorb shocks. However, vulnerabilities have increased in some parts of the system. Valuations of many financial assets have continued to rise, increasing the risk of a sudden correction. At the same time, global sovereign debt issuance is growing, and hedge funds have increasingly absorbed this debt in recent years. Individually, these vulnerabilities are manageable. But with increased economic and geopolitical risks, it is more likely a new shock or a combination of shocks could cause multiple vulnerabilities to crystalize at once. If this were to happen, these vulnerabilities could interact and reinforce each other. In the extreme, a cascading series of events could cause a sharp loss of investor confidence. This could lead to liquidity hoarding or rapid asset sales, putting pressure on core funding markets. Stress could then spread across the financial system and the broader economy. Just in | BoC Financial Stability Report Highlights Elevated Risks Yet Affirms Resilience of Canadian Financial System. BOC SAYS NEW SHOCKS MAY EXPOSE SEVERAL VULNERABILITIES AT ONCE. A SERIES OF EVENTS COULD LEAD TO A SIGNIFICANT DROP IN INVESTOR CONFIDENCE AND AFFECT MAIN FUNDING MARKETS, ACCORDING TO BOC.