The 3-month Commercial Paper rate (from 1993Q3 to 2007Q2). Lockdowns and public health restrictions significantly reduced revenues for some, and supply chain disruptions continue to test business models. Canada set out on Thursday C$11.3 billion ($8.2 billion) in new spending this year and next, and slashed its budget deficit forecast by nearly a third for the current fiscal year, in an economic update it promised would not push up inflation further. The series name refers to GDP as of the first quarter (Q1) of 1987. However, estimating the growth of institutional investments in these assets and related infrastructure is difficult due to the lack of readily available and consistent data on the exposures of financial system participants to these markets. Inflation in Canada has slowed to 6.9% in September from a peak of 8.1% earlier in the year, but core measures remain sticky. They assumed no remedial fiscal and monetary policy measures, so the recession had a long-lasting negative impact on the Canadian economy. Box 5: Stablecoins and their risks to financial stability, Stablecoins aim to meet the demand for a liquid and less volatile cryptoasset. Chaired by the Bank of Canada, the HoA brings together the Department of Finance Canada, the Office of the Superintendent of Financial Institutions (OSFI), Quebecs Autorit des marchs financiers, the Ontario Securities Commission, the British Columbia Securities Commission and the Alberta Securities Commission. The market consensus on the mortgage rate forecast in Canada (as of October 26, 2022), is for the Central Bank to increase mortgage interest rates by another 0.50%, to a 4.25% high in 2022, with a potential for further increases in 2023 if inflation is not on track to drop less than 4.25%. The Business Outlook Survey summarizes interviews conducted by the Banks regional offices with the senior management of about 100firms selected to reflect the composition of the gross domestic product of Canadas business sector. Market operations and liquidity provision, Canadian Alternative Reference Rate Working Group, GMF publishes a consultation paper on a proposed fee for failing to settle GoC securities, Summary of Comments Fall 2022 Debt Management Strategy Consultations. In the event of a sudden repricing of risk, financial or commodity-trading firms that are highly leveraged may be unable to meet margin calls or interest payments. Concerns about corporate leverage in the property sector in China could intensify further. See European Securities and Markets Authority, , 56. Supply will continue to adjust accordingly, but pressure on supply chains could create a desynchronization of supply and demand that would negatively impact growth. Percentages may not add to 100 because of rounding. Domestically, many of the cyber security initiatives the Bank leads are taking place through the Canadian Financial Sector Resiliency Group (CFRG) and the Resilience of Wholesale Payments Systems (RWPS) initiative. In theFinancial System Review, the Bank of Canada identifies the main vulnerabilities for and risks in the financial system in Canada and explain how they have evolved over the past year. We use cookies to help us keep improving this website. In the short term, concerns around global energy security are likely to delay the transition, while the long-term impact is highly uncertain. But investors can also increase vulnerabilities linked to higher house prices:18. See L.Morel, Analyzing the house price boom in the suburbs of Canadas major cities during the pandemic, Bank of Canada Staff Analytical Note (forthcoming). While ransomwarethe most common cyber threatcould have consequences for the entire system, it has been used mainly to extort money. The income that investors report to lenders in their mortgage application usually includes a portion of their actual or expected rental income. However, their consumption habits are expected to return to normal as restrictions on the services sectors gradually ease. Macroeconomic Outlook Brace for a 'bumpy' landing, Canada September 12, 2022 We expect the coming downturn in Canada will be 'moderate' by historical standards. [, 50. The Bank is forecasting growth of about 4% in 2022, easing to 3% in 2023. The number of households is rounded to the nearest 10,000. Many households have taken on large mortgages relative to their income in the context of elevated house prices. Today's fiscal update saw a notable reduction in the deficit projection for the current fiscal year and, even with some less favourable economic projections from here and modest spending increases, the updated longer-term projections now show a slim surplus being achieved by fiscal 2027 . What you need to know about the Bank of Canadas latest assessment of vulnerabilities and risks to Canadas financial system in brief. Cryptoasset markets remain small on a global scale but have grown rapidly in recent years. The Evolution of Canadian Labour Markets Governor Tiff Macklem speaks before the Public Policy Forum (12:10 (ET) approx.). Most businesses that expect inflation to be substantially above 2% anticipate that it will return to target within three years. Liquid assets include cash, bank deposits and savings, bonds, mutual funds and stocks but exclude pension and retirement funds.Sources: Statistics Canada and Bank of Canada calculationsLast observation: 2021, Note: Data include purchases and refinancing originated by federally regulated financial institutions. In contrast, cyber attacks performed in the context of a geopolitical military conflict, which could include targeting a countrys financial system, are purposely designed to inflict the most damage. They described seeing a decline in competition for labour, including less poaching, compared with 12months ago. Stablecoins have emerged as a potential solution to price volatility in the cryptoasset market (, requesting many federal government agencies to jointly examine the regulation of digital assets, regulatory approaches to maintaining the security and stability of the financial system as digital currencies become more common, the potential need for a central bank digital currency in Canada. CARR brings together the Bank and 22firms from across the Canadian financial system. This risk was discussed at length in the 2021 Financial System Review. Their resilience is supported by solid capital positions, a robust capacity to generate revenues even in times of stress and sound underwriting practices. This means that the repercussions of a shock would adversely affect the real economy through financial linkages, even if the banking system remained solvent. In the context of the ongoing monetary policy normalization in Canada and abroad, the Bank looked at the interest rate risk associated with the outstanding debt of publicly listed businesses. Additional options not shown here include Other and I don't think there will be a recession in the next 12 months. Recent publications and latest forecasts. Therefore, vulnerabilities highlighted in this report are primarily macrofinancial in nature. We are imperfect people, in an . However, global demand remains strong and should continue to support the economy despite downward pressure. This improvement is due in part to the favourable impact that rising commodity prices are having on corporate balance sheets in the resource sectora sector where firms have historically been more financially vulnerable. In fact, this is the highest rate for this response since the Bank introduced this survey question in 2016. For more details on the estimation of the House Price Exuberance Indicator, see U.Emenogu, C.Hommes and M.Khan, , 17. The greater frequency and sophistication of state-sponsored cyber attacks in the context of Russias invasion of Ukraine increase the risks that a successful attack could significantly disrupt the Canadian financial system. As the global economy emerges from the COVID19 pandemic, several factors have combined to increase volatility in financial markets and reduce investors appetites for risky assets. . Between 2007 and 2020, the share of Canadian fixed-income mutual funds allocated to corporate bonds increased by 17percentage points, and their allocation to BBB-rated corporate debt increased by 19percentage points. Bond purchases changed the composition and distribution of HQLAs among participants in the financial system. -. This short-term increase in prices could promote investments in carbon-intensive sectors in some jurisdictions, which could lead to a larger economic impact, including stranded assets, as the world shifts to cleaner forms of energy. improved, deteriorated or remained the same? Other BOS respondents, including those tied to hard-to-distance services, expect their sales growth to remain healthy but to moderate to a more normal rate after the period of exceptional strength they recently experienced. The heat map is characterized by three separate colour groupings. See US Securities and Exchange Commission, , 38. They also expect their wage increases to soften from high levels. Although 17% of firms were at risk, these firms are typically smaller and accounted for much less of a share of overall corporate debt in the fourth quarter of 2021 (1.6%). This more-cyclical era won't begin until 2022 or 2023, but it's coming. Cryptoassets are, however, becoming more integrated into the traditional financial system, increasing the risk that shocks to these markets could affect the broader financial system. Reducing and managing vulnerabilities increases the resilience of the financial system and supports financial stability. Staff also assign variable-rate mortgages as fixed or variable payments depending on the product offered most by their lender. For financial instruments to be appropriately priced, market participants need access to reliable information on firms and financial institutions exposure to climate-related risks and on their transition plans. Background After each quarterly release of the National Economic Accounts data, Bank of Canada staff analyze the Canadian and international economies and produce forecasts for many macroeconomic variables. The Bank expects Canadas economy to grow by almost 4 percent on average in 2021 and 2022, following a decline of about 5 percent in 2020. We forecast that real GDP will grow by around 5% in 2022below the government's 5.5% targetand by 5% in 2023, though risks are tilted to the downside. Businesses plans to increase their capital expenditures also remain supported by their long-term investment intentions and healthy demand for their products and services. Bank staff used the updated version of the HRAM to estimate how household balance sheets have likely evolved since 2019, the most recent year for which these data were available. The Bank is forecasting growth of around 4 percent this year and close to 5 percent in 2022. A sizable decline in house prices could reinforce this effect. The Bank expects a sharp rebound in economic activity in the reopening phase of the recovery, followed by a more prolonged recuperation phase. It is clear that the evolution of the pandemic remains the biggest uncertainty for these forecasts. For a discussion of impacts of a cyber attack that paralyzes the ability of one or several banks to send payments, see A.Kosse and Z.Lu, , 60. In this exercise, households do not make accelerated or lump-sum payments, renew early, lock in a fixed rate on a variable-rate mortgage or fall into arrears. While inflation has come off its peak, it remains too high. Alternatively, the data is available for download in: * Percentage of firms reporting positive sentiment minus the percentage reporting negative sentiment; double-weighted balance of opinion; range of potential outcomes is from -200% to 200%.Note: This question was not asked in September. Despite that effect, there are in fact price increases. The level of confidence was the highest reported since the first Financial System Survey in spring 2018. The sample of 1.4million mortgages represents about three-quarters of all mortgages issued by federally regulated financial institutions over these two years. The following agencies are taking part: OSFI, CMHC, the Department of Finance Canada, FSRA and BCFSA. However, the divergence between U.S. and Canadian interest rates should help keep the Canadian dollar close to US$0.77 despite the risk of a more urgent change of course from the Federal Reserve. Safe and robust payment systems are crucial to overall financial stability.68 They enable consumers, businesses and governments to safely and efficiently purchase goods and services, make financial investments and transfer funds. A current ratio below 1 would therefore indicate a firms liquid assets are not sufficient to pay short-term debt obligations. The subgroup seeks to deepen its understanding of the vulnerability by analyzing several factors: SRSC subgroup on investor demand for housing. Many firms expect slower sales growth as interest rates rise and demand growth shifts closer to pre-pandemic levels. This forecast should be taken as a general direction, not a finely-tuned prediction. In 2021, we renewed Canadas flexible inflation-targeting framework for 2022 to 2026. The Canadian economy is expected to continue to grow, remains fairly low. Bank staff continue to assess this vulnerability and research potential channels to increase bank capacity to intermediate in fixed-income markets. Specifically, for firms at risk, both the interest coverage ratio and the current ratio are below 1. In the event of an operational incident with potential systemic consequences, the CFRG helps coordinate the response of its participants. [, 49. The OECD Economic Outlook is the OECD's twice-yearly analysis of the major global economic trends and prospects for the next two years. The thinking was that if lower-rated firms rely on these riskier and costlier forms of financing, it must be because they have few other financing options. Considerable swings in prices make these assets inadequate as a method of payment; consequently, they remain primarily a speculative investment. [, 54. In this role, the Bank will build confidence in the safety and reliability of services provided by PSPs while protecting end users from specific risks. Domestically, the Bank is actively involved with federal and provincial authorities on issues pertaining to the financial system. Recent global geopolitical conflicts have heightened this risk. The. In a crisis, if many asset managers try to generate cash by selling fixed-income assets, and other financial market participants are unwilling to buy these assets, it may fall upon bank-owned dealers to buy these assets and hold them on their balance sheets. Our 2022 GDP growth forecast for Canada remains at 3.7%. Money markets now price in a 62% chance the Bank of Canada will hike by 50 basis point in December, up from about 50% before Friday's jobs and unemployment data. As a result of this event, one systemically important financial institution or FMI becomes unable to provide services. Part of the exceptional increase in house prices observed since the start of the pandemic may have reflected extrapolative price expectations. Over the medium term, the situation is more uncertain. The survey results are a useful benchmark to compare Bank views and analytical work with outside opinions. The sample ranges from the first quarter of 2012 to the first quarter of 2022. The desire for energy security could also boost the credibility of existing transition plans, helping reduce market mispricing. The Bank has also participated in similar discussions and simulations with its G7 counterparts. The indicator does not detect signs of house price exuberance elsewhere (shades of green). Note: Interest coverage ratio is defined as earnings before interest, taxes, depreciation and amortization divided by interest expense. In addition to causing untold human suffering, Russias invasion of Ukraine is also adding to inflationary pressures, both by boosting commodity prices and creating additional supply chain issues. The Canadian economic outlook for 2022 is nevertheless encouraging. The Bank is forecasting growth of 4% in 2022 and about 3% in 2023. The TransUnion dataset was anonymized, meaning it does not include information that identifies individual Canadians, such as names, social insurance numbers or addresses. Figure 1 is a map that shows the growth in house prices in the Toronto and Montral regions. Growth in house prices has been vigorous and regionally broad-based. Amid healthy demand and capacity constraints, BOS participants reported that increasing investment costs and further expected interest rate hikes are not yet holding back their investment plans. Cyber threats represent a continued vulnerability given the interconnected nature of the financial system. Like the market for unbacked cryptoassets, the market for stablecoins has grown rapidly over the past two years. The federal government will deliver its 2022 fall economic update on Thursday, with experts expecting a subdued fiscal statement from the Liberals as recession calls grow louder. These households are more vulnerable to declines in income and rising interest rates. That will be the case for housing starts as well. Note: High loan-to-income ratio includes mortgages that had a loan-to-income ratio above 450% at origination. However, the divergence between U.S. and Canadian interest rates should help keep the Canadian dollar close to US$0.77 despite the risk of a more urgent change of course from the Federal Reserve. Current ratio is defined as a firms current assets divided by its current liabilities.Sources: FactSet and Bank of Canada calculationsLast observation: 2021Q3. About 75% of variable-rate mortgages have fixed payments. Learn more about our ongoing work on digital currencies. The new dataset tests this theory. This survey was conducted by phone, video conference and in-person interviews from August15 to September9, 2022. Through these connections, other systemically important financial institutions or FMIs that are linked to the institution affected by the initial attack may also become compromised. Future sales (balance of opinion*): Over the next 12 months, is your firms sales volume expected to increase at a greater, lesser or the same rate as over the past 12 months? A subset of fixed-income funds that hold lower-rated, relatively illiquid bondsmaking them most likely to rely on cash buffers in a crisiswas the main factor behind this growth. To protect the privacy of Canadians, TransUnion did not provide any personal information to the Bank. This . The Bank is also continuing its policy of quantitative tightening. The Bank is currently supporting the Department of Finance Canada in developing the regulatory framework for the new retail payments regime. The share of purchases by investors could be larger than reported here because the calculation excludes purchases made using cash only, those made by foreign buyers if the buyers did not obtain a mortgage in Canada and those made by businesses. It is important to distinguish short-term or transitory inflationary pressures from those that are systemic and structural. Results of the third-quarter 2022 survey | Vol. * (share of firms), * Respondents were asked to select all that apply. Firms could mention more than one bottleneck; mentions were then pooled and counted only once by type of bottleneck.Last observation: Businesses anticipate that their sales will grow at a slower pace over the next 12months (Chart8, blue bars). Again this year, growth will be limited by spillover effects from the pandemic. For example, prices of cryptoassets such as Bitcoin and Ether were generally four to five times more volatile throughout 2021 than the S&P500 stock market index was. This means that household net worth is now more sensitive to movements in house prices. CDOR is a major interest rate benchmark in Canada; it underpins more than $20trillion worth of derivatives, securities and loans and plays a key role in the market for bankers acceptances. elevated commodity prices often tied to the ongoing war in Ukraine, lower commodity prices, which some associated with an end of the war in Ukraine, waiting for signs of concrete cost increases, paying close attention to competitors prices. Such an attack could have far-reaching effects on the broader financial system. The three findings in this analysis suggest that any disruptions to the high-yield bond markets would not have broad impacts on the Canadian financial system and economy. This includes research on a Canadian central bank digital currency (CBDC) and on financial technology (fintech). These global risks represent important potential threats to financial stability in Canada, and their implications are examined later in this report. The central bank now expects inflation to average 7.2% in 2022, up from 5.3% forecast in April, easing to about 3% by the end of 2023, and then back to the 2% target by the end of 2024.. Looking beyond average balance sheet statistics to evaluate household vulnerabilities is important. Vintages available: 1982Q2 to 1999Q4 and 2011Q1 to 2016Q4. In April 2022, the Bank officially started the process of reducing its holdings of maturing GoC bonds, a process known as quantitative tightening (QT). Observations from 1987Q1 onward are forecasts. They are the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.Sources: Big Six banks public quarterly financial statementsLast observation: 2022Q2. Following Russias invasion of Ukraine and the corresponding increase in risks to cyber security in the financial sector, the Bank and its partners reinforced their cooperation and information sharing. Higher yields should encourage other participants, such as commercial banks, households, businesses and investment funds, to hold more GoC bonds. From our blog: Are Canadian businesses reshoring their production? The American governments extraordinary fiscal measures supported consumption, but there is still a long way to go in terms of employment. Take a central role at the Bank of Canada with our current opportunities and scholarships. The Canadian economy is once again growing robustly, and the recovery from COVID-19 continues. If these non-bank sector participants make new bond purchases, they would draw down their deposits at commercial banks to do so. Additional information on the survey and its content is available on the Bank of Canada's website. Moreover, elevated prices for fossil fuels will encourage consumers and businesses to transition away from this form of energy more quickly. Results from the Business Leaders Pulse (BLP) show that business sentiment remains positive but has trended down since April (Chart1). The figure on Bitcoin ownership for 2021 is from the Banks Bitcoin Omnibus Survey, the results of which will be released in a forthcoming publication. Increases in commodity prices, including oil, supported the Canadian dollar in 2021 at around US$0.80. Information contained on this site has been prepared by Scotiabank Economics. For instance, in March2022 the US administration released an expansive executive order: In Canada, provincial securities administrators have issued guidance for the regulation of cryptoassets and cryptoasset trading platforms that meet the definition of securities or securities market infrastructure, respectively. In the third quarter, most businesses that adjusted their price-setting practices have already returned to or will soon return to their pre-pandemic behaviour, including: Still, some firms anticipate that unusual price setting will continue until supply chain and inventory issues are resolved. This happens when people come to expect that house prices will rise in the future simply because they have risen in the past. The problems created by these bottlenecks will persist for much of 2022. Work continues to prepare financial markets for the discontinuation of the remaining US-dollar LIBOR rates after the end of June2023. Subscribe. The survey results summarize opinions expressed by the respondents and do not necessarily reflect the views of the Bank of Canada. Real GDP Policy Rates Foreign Exchange Rates Commodities PDF version Download Full Forecast Tables (PDF: 209.0 kb) As well, ongoing quantitative tightening may reduce excess liquidity in the banking system and place downward pressure on banks liquidity coverage ratios (Box4). Demand for labour is expected to continue to recover while fiscal measures are reduced and as COVID-19 concerns ease. Households that want to borrow funds using a home equity line of credit (HELOC) must have at least 35% equity in their house (i.e., the size of the HELOC must not exceed 65% of the value of their house). As explained in the 2021 Financial System Review, such an event would have an amplified effect on the macroeconomy given the two vulnerabilities identified in this reportthe elevated level of household indebtedness and elevated house prices. The share of investors who took out at least $5,000 in equity in the three months before they purchased an investment property rose substantially since the start of the pandemic (Chart2-B). The Bank continues to partner with Payments Canada and industry organizations to modernize Canadas core payment systems, notably around two initiatives: The Bank continues to prepare for its new role supervising retail payment service providers (PSPs).71Retail payments is an area of the financial system experiencing rapid growth and innovation, and PSPs are evolving in the electronic payment ecosystem. Stablecoins often provide the illusion of stability. So far in 2022, Canadian businesses have issued high-yield bonds at a slower pace than that of the previous two years, when many firms increased their issuance to take advantage of favourable financing conditions (Chart13). Global financial markets have already experienced a correction. 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