The Bank of Canada issued a warning on Thursday that the ongoing tariff dispute has "disrupted markets" and increased the risk of "irrational" selling, which could pose a severe test to the financial system. The impact could not only reach banks and other financial institutions but also make it harder for households and businesses to repay their debts.
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In its annual Financial System Review released on Thursday, the bank noted that while Canada's financial system remains resilient, prolonged tariffs imposed by the U.S. and Canada's subsequent countermeasures could trigger more intense market volatility, force asset prices to reprice, and bring about serious and sustained liquidity pressures.
"The long-term trade war is the biggest threat to Canada's economy and significantly increases risks to the financial system," the report warned specifically. In extreme cases, market volatility may escalate into market dysfunction. If the global trade war persists in the medium to long term, economic growth will be suppressed, unemployment rates may rise, and this will increase the debt burden on Canadian households and businesses.
According to scenario predictions included in the report from the International Monetary Fund (IMF), Canada's GDP may fall by 5.1%, the unemployment rate could peak at 9.2%, house prices would drop by 26%, and stock markets could decline by 36%, falling from peak to trough.
Bank of Canada Governor Tiff Macklem told reporters, "There is extremely high uncertainty at present. Our analysis is not a prediction but an assessment of vulnerabilities."
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The report indicates that if the trade war continues, some households with high debt levels may default. Although the banking system currently has sufficient liquidity and access to financing channels, "if credit losses reach a certain scale, banks may tighten lending, making it even harder for troubled households and businesses to obtain loans to get through difficult times. This vicious cycle could exacerbate overall economic downturns."
The report also mentioned that approximately 60% of households with mortgages will renew their loans this year or next, and most will face rising repayment amounts because they initially borrowed at very low interest rates. However, due to current interest rates being lower than last year's expectations, the household debt-to-disposable-income ratio has eased somewhat.
By contrast, households without mortgages are facing greater financial pressure. Senior Deputy Governor Carolyn Rogers pointed out, "The proportion of households without mortgages that are overdue on credit cards and car loans is still rising."
The central bank also warned that some companies face similar risks. Those with high leverage, weak profitability, and low cash reserves may struggle to withstand debt pressures, and the likelihood of encountering repayment difficulties is also increasing.
In addition, the central bank expressed concern over the growing influence of hedge funds in Canada's government bond market. The report stated that these investors typically use substantial leverage and may quickly withdraw funds under market stress, thereby exacerbating asset price volatility.
Senior Deputy Governor Carolyn Rogers stated in the statement, "Hedge funds must be prepared to meet sudden liquidity needs without disrupting normal market operations."
Despite multiple risks, the central bank emphasized that Canada's liquidity levels remain high, the financing environment is stable, and the financial system as a whole possesses strong resilience. Central bank officials said that Canada's banks "have the ability to withstand economic and financial pressures for a certain period."
Source link:
- https://financialpost.com/news/economy/bank-of-canada-warns-tariffs-could-trigger-market-dysfunction
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