Thanks to a growing economy and changes in housing regulation, the Bank of Canada sounded a bit more sanguine on risks facing the financial system. Today's semi-annual Financial System Review noted that key vulnerabilities related to household debt and housing market imbalances remain elevated, but in contrast to prior reports, haven't necessarily increased over the last six months.
The bank has emphasized that the economy will be more sensitive to higher interest rates than in the past due to elevated household debt levels. Today's report provided little new insight on that interaction, so it's tough to draw implications for monetary policy. But we think it's worth remembering what Governor Poloz said around the time of the June FSR: with the economic backdrop having improved, monetary policy and financial stability goals are less at odds with one another. Higher interest rates will both keep the economy from overheating and help address key vulnerabilities. So while the bank will likely raise rates more gradually than they otherwise would, household indebtedness isn't necessarily an impediment to tightening monetary policy.