Thursday , October 6 2022

Progress report for the end of the year: financial illnesses



Today we combine two traditions: an old one, a new one. The older traditions that have been with more than a decade The Canadian Government Bank has talked about the state of the financial system in Toronto's final speech. Every year, the traditional innovation begun this year is to provide an annual financial account with the following announcements of interest rates coming from us. Money Policy Report (MPR), like yesterday.

Combining my two traditions, my motivation is just to increase productivity. Ten years ago, the global financial crisis gave us the precedence of the repetition of the Great Depression of 1930. Thanks to the aggressiveness of tax and monetary policies, we avoided that. But a decade of a massive monetary stimulus has brought us a critical phase in the economic cycle.

The Canadian economy has been in power for more than a year, its unemployment is the smallest in the decades, and inflation is targeted. Historically, this is the point of the business cycle, where inflationary pressures can begin to build, so it is natural that we seek to move interest rates to a neutral level. At the same time, ten years after the exception of interest rates led to the evolution of home equity mortgages primarily. And we know that in recent years, the price increase has increased, especially in some of our biggest cities.

These financial shortages have made monetary policy more difficult. The Bank's priority is included in the process of understanding and integrating them into the process of integration. In the meantime, the world has not stopped still since last MPR in October. In fact, it has been more macroeconomic developments than usual. Today, my focus is updating and we are concerned about the financial stability in the decision making process.

Growth of financial weaknesses

My weaknesses began in a few words to find out how our weak economies began. In fact, debt is generated in the recovery phase in all economic cycles. Low interest rates promote recovery by encouraging home and business loans. The economic cycle is usually sufficient because the risks caused by these imbalances are relatively minor.

Of course, the last 10 years are unusual. Interest rates have been very extraordinary over a long period of time. The result was the high demand for housing, the rise in house prices and the domestic debt of historical proportions. In accordance with the development of the planned financial capabilities, the Bank has been concerned for many years. In fact, Canadian domestic debt was growing against the financial crisis, above all, 15 years ago, as a result of a reduction in mortgage regulations, financial innovation and interest rates fell.

In response to these developments, the federal government has set a more rigorous macroeconomic rigor to make the new loans safer. Particularly, the revised B-20 policy introduced in this year's financial year, the mortgage lending of new institutions regulated by federated entities was considered as an accident test, allowing lenders to increase interest rates. You can find more details about this stability and stability in the Financial System at the Bank's website.

Now, I hear all those people who say that this stress test does not apply to overheated residential homes all the time. But the point of change of B-20 did not adapt to housing markets. The goal was to increase the future resilience of the new home debt. All Canadians expect higher rates of interest rates, not just in hot residential homes.

Still, the housing policies that the local and municipal governments have put together are the probability tests, the highest interest rates and the home loan. We're seeing much less than the debt-income ratios of more than 450 percent of mortgages. And according to credit data, mortgage loan growth slowed more than 3 percent this year. This figure makes it possible to establish a moderate drop in the full income relationship.

By setting monetary policies, it is essential to decentralize the effects of these policies. We should know the slowdown in credit growth due to the highest interest rates and other policies. How large does the highest interest rates at home expenses? And how are some macro-developed policies, the B-20 guide, the behavior of borrowers and home builders?

Of course, there is no way to give specific answers to these questions. But the financial system needs to understand how the development affects the real economy and what is at stake. I talked about this topic almost four years ago at a Western University conference. I talked about the idea of ​​developing a great synchronization: how to influence the utopian economic model, how to effect the real economy of the financial system, and vice versa, and help us to control our inflationary control.

We can never reach that utopia. But good news is that we've made a lot of progress. I have mentioned three important improvements.

First, a new concept (growth hazard) that develops the International Monetary Fund is being used by bank staff to understand the links between the financial sector and the real economy. It threatens the growth of financial weaknesses and the growth of economic growth. Therefore, when faced with the change in interest rates, we can calculate the indirect effects of direct economic consequences and the financial weakness channel through indirect effects. The scope of risk growth is not a big synthesis, but it gives a more rigorous view of financial weaknesses in the field of risk management policies.

Secondly, we have renewed our main economic model to increase the accumulation of domestic debt and, consequently, to make the economy more demanding for higher interest rates. It also covers the link between debt and housing prices. These difficulties are important steps that will help us understand the impact of the economy.

Third, Bank employees are working on new microdata sources to understand the interest rates on mortgages that cause higher mortgages. We can obtain anonymous data in the individual loan until 2014, approximately 85 percent of the mortgage loan. It includes information on mortgage size, domestic income, initial interest rate, mortgages, and repayment period.

These data help us calculate how homes with the highest interest rates through the mortgage renewal cycle. In calculating the effects of rising interest rates on domestic expenses at home expenses, we plan to influence the cost of other purchases.

So far, this improvement framework has been well done for our advertisers. However, it is important to note that most homeowners are currently renewing the mortgage rates, which rates five years ago are quite similar. When progress is made, people will be getting more and more interested when they are renewed and will know how people fit.

Certainly homes with highly-dwelling homes will face a difficult adjustment to reset their mortgages and interest rates will rise. However, these adjustments will not be less stringent, despite the negative ones, of negative economic damages, especially if they do not have financial weaknesses.

Now, since spending at home is roughly up to date, it gives us more confidence in what is happening to the economy. But lenders and lenders continue to adjust interest rates and new mortgage regulations. So, we are seeing a lot of tendencies in mortgage markets. For example, the part of the mortgage outside the federal jurisdiction, even from private loans and credit unions, is rising. These loans are not subject to a stress test at a formal interest rate. We have seen an increase in future mortgage loan shares in Toronto, but we do not have such data outside of Ontario.

We have also seen a greater share of the loans, with variable rate mortgages. In this way, the debt service is being charged, usually the mortgage rate variable is lower than the fixed interest rate mortgage. This allows short-term savings or savings to free money, but lenders have increased interest rates on the road. That said, the stress test gives us local confidence that these loans can manage payments significantly higher.

In summary, while the quality of new credit enhances, the mortgages remain dangerous. Over time, mortgages should be less dangerous in the way they are slowly paid. Still, this vulnerability will last for many years.

They are close to the development portfolio of home-based markets. Everyone talks about this, it's not surprising that the price of homes in the Toronto area exceeds 40 percent over 40 years ago. In the Vancouver area, there was an increase of around 50 percent. Outside these two areas, the average price of homes has only risen by 5% over these three years.

In light of the key factors, home prices have increased in Toronto and Vancouver. The force of growth in population and employment supports the demand for housing. Different income includes costs, such as construction work and development rates. At the same time, many policies and other factors have limited opportunities in both places. If the supply does not extend to a high demand climate, you have a prescription price recipe.

That said, it was clear to us that the growth of prices increased speculative activity, especially in 2016-17. Some buyers accelerated their purchases, motivated by the fear of being marketed. Others, especially investors, bought real estate prices by assuming an upward trend. It is significant that, due to the increasing prices due to the constant expansion of speculative activities, economic shock causes a significant drop. Anyone who remembers the Toronto home and home market in the decade of the decade acknowledges this point. And the effect of this fall increases due to the fact that the owners of the house are very impoverished.

The bank has had a key interest rate five times in the last year and in the middle, with a total of 125 points. And some Canadians have heard, lately, more concerned about the rise in tax rates. However, taking into account the combined effects of provincial and municipal measures, macroeconomic policies have been tightened, without mentioning the highest interest rates, Canada's prices generally rise at an annual rate of around 2 percent. Domestic price inflation slowdown is much more significant in terms of home purchases for the first time than the interest rate movements. Basic economic laws state that the provision of increased supplies will be the most effective way of providing accessibility. Measures to increase orders, without the increase of supply, could be worse for homes.

Due to rising interest rates, it is closely linked to the Canadian financial stability, which is a delay in the interest rate world. The percentage of the rise in world bond yields that Canada would normally import from 60 to 70 percent would see the impact on mortgage rates, even though the Bank of Canada's policy rate has not changed. This risk lies below the mind, especially the conflicts of the bond and capital market in recent weeks. Most observers believe that the catalyst for these risks is likely to have some exclamations of inflation coming from the United States, which is the probability that the US economic economy has led to economic recovery. However, according to our estimates, the US economy will continue to grow ever more sustained until next year and until 2020 and the expectations of inflation remain very well.

So, summarize the financial situation. The Governing Council's general risk level in the Canadian financial system is about six months ago, when we published it Review of the Financial System. A new mortgage loan is more sound and house prices have risen. However, the amount of housing debt will be maintained for many years and price prices will continue to rise in certain markets. Our new growth risk framework clearly shows that macro-lending policies have worked to mitigate the financial stability risk by improving the problem of risk management against monetary policy.

Macroeconomic risks and inflation forecasts

Let me turn to macroeconomy. As we have said in October, since it maintains the power of more than an anniversary of the economy, inflation is the goal. From October onwards, important developments have taken place.

First and foremost, the global slowdown in the global economy has been growing. I would like to conclude that our forecasts required moderation of the 2019-20 economic growth, but this would only lead to sustainable growth and would not have any concern. However, the main risk we see from today's perspective is the constant commercial tensions between the United States and other countries, especially China.

Increasing the price will slow down economic growth and reduce productivity on both sides and create inflation risks. This combination is particularly a challenge to monetary policy because it infects the rate of interest rates and the highest interest rate for repaying economic growth. I think the effects of the economy would probably be structural, rather than cyclical, I think that the risks of inflation are essential during the war of commerce.

Most importantly, the risks of global trade are both sides. Yes, there is more and more evidence that the commercial actions have negative macroeconomic consequences. But central banks can not focus solely on cases of ill-treatment. The highest risk is that the United States and China have terms, and there is a new lifts in the global economy. The events last weekend boasted a lot in Buenos Aires. So we continue to weigh the two sides of the problem.

With regard to the Canadian economy, according to data from the October MPR, it was a bad side. While the GDP of the third quarter was close to our expectations, there was no underlying growth, and the economy was less favorable than in the fourth quarter.

Although the latest data from the home sector is more robust than expected, we believe that it is the result of a significant adjustment to housing in newly built homes. This adjustment has slowed the construction of the home this year earlier. Growth in population and employment, and therefore the demand for housing continues to be crucial Credit growth has also been strengthened, and this is supported by our view that the market is stabilizing.

Business investment slowed down in the third quarter. This year we identified the uncertainties about the future of the NAFTA as investment decisions. Today, this effect has been very hard during summer, when uncertainty was at its tops. The second factor was the delay in the trans Mountain Pipeline project to reduce business investment.

The signing of CUSMA is likely to support the return of investment, especially for the limitations of ongoing capacity and the government's implementation. Additionally, the taxation announced recently by the federal government will lead to greater investment. This also suggests continued growth in exports, which is backed by strong foreign demands, but limited by limited capacities.

In the latest version of the GDP, Statistics Canada has declined historical estimates of economic growth. Most of these analyzes began in 2015 in the economic structure, with significant falls in the prices of the oil economy. The evolution of 2015 may have an impact on the 2018 economies, but they do not. Today, GDP is considered to be almost 1 percent lower than before. The effect of the review of inflation forecasts depends on the demand for the change in the amount and the amount of supply or economic capacity, and thus how the estimation of estimates between the two parties is affected. For example, we will say in our January MPR, once we have completed our study.

Much of the debate on the Governing Council is aimed at oil. The general oil prices are above the forecasts of our October MPR, mainly due to supply strength. In addition, there is a growing concern about the moderation of global economic growth, with greater commercial volumes, with future demands of future demand.

The main source of supplementary oil supply is the same as in 2014: in the United States. As a reference, the world consumes about 100 million barrels of oil a day. In 2008, US production was around 7 million barrels per day. For 2014, the revolution of the shale gave 12 million dollars. Today, US production is more than 15 million barrels per day, more than double the 2008 level. Two million years ago, a year earlier, oil exports rose to the same amount in the United States.

Canadian Nano-Produced Production Developments account for about 5 million barrels a day and more than 3 million are exported. Oil prices in the world have a direct impact on Canada, as we know from our experience in 2015-17 years. This affects all producers in the east and west. While the Canadian economy adjusted to a lower oil price until mid-2017, the cost structure and the wages and employment of the oil production regions continued to continue. In fact, the Canadian economy's oil and gas production quota has dropped from 6% to 3.5% today.

The drop in world oil prices increased in Western Canada, a discount applied to our heavy oil, according to Western Canada Select. This is largely due to transportation limits, but some key US refineries were made up during the fall of the maintenance shadows. With regard to the October rate decision, oil discounts have shaken a bit as US refineries have made their way back online. However, in recent weeks, the price of crude oil of Western Edmonton Par has also been discounted, since the inventory stored has exceeded record levels. Alberta will help to impose exit restrictions and increase the rail capabilities to clean up the delay and help the more powerful gas pipeline in the long run.

Until we prepared a new economic forecast, we will decide yesterday between January and the next decision. It is already clear that western Canada is developing a painful adjustment and will have a significant impact on Canadian macroeconomics. For this reason, since the consolidation of the energy sector since 2014, the net result of the cost of the Canadian economy, the dollar dollar, should be lower than in 2015.

In summary, then, as I have said, a lot has happened since the October MPR. However, we did not forget that this development has been behind an unemployment rate for the next 40 years and the inflation nearing the end, in line with its power economy. We will evaluate these new developments in the new processes in the January MPR.

The Governing Council yesterday stated that the interest rates are still appropriate. And if all of these developments are weakened, we believe that the policy interest rate should be neutral in districts of 2.5 to 3.5 points in order to achieve inflation. The pace that happens in this process, of course, will be decisive. We will increase the impact on the rise in interest rates on consumption and housing and monitor global development of the trade policy. We will also take into account the sustainability of oil price growth, the evolution of business investment, and the assessment of the economic capacity, primarily on the future decisions of monetary policy.


The time will end I hope my discourse has shown how financial weaknesses are part of our monetary policy debates. We have made progress towards understanding the dangers of these and other weaknesses and the economy. I wanted to give a sense of many issues that we are managing to handle macroeconomic risks in the Canadian economy. We will continue to manage these risks with the mandate of our inflation control and to promote Canada's economic and financial well-being.

I'm very happy about the holiday and the best new year.

I would like to thank Don Coletti for his speech.

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