Today we combine two traditions – one old, one new one. The old custom, which has been back over ten years, See that Governor Bank of Canada talks about the state of our financial system in an end-of-year talk in Toronto. The most recent tradition, which started this year's start, has been offered an Economic Progress Report four times a year, following the interest rate statements that will not join us Money Policy Report (MPR), yesterday yesterday.
I am encouraged to combine these two cultures more than just trying to build fruit. Ten years ago, the global financial argument gave us the provisions for the Reimbursement of the 1930s Greater. Thanks to financial and financial policies, beyond that. But ten years of major financial incentives have become essential in the economic round.
The Canadian economy has been working near its capacity for more than a year now, unemployment has a minimum in decades, and target inflation has. Historically, this is the place in a business cycle where there can be a weight in the & # 39; and so it is natural that we look at moving levels of interest to a neutral level. At the same time, the decent decade of reasonable levels has continued to build on housing debts, and # 39; Most mortgages are. And we are all aware of a huge increase in house prices in recent years, especially in some of our largest towns.
These financial risks are to make money policy more complex. It has been a key objective for the Bank to understand them and integrate them into our policy process. At the same time, the world has not yet been standing since our MPR in October. Indeed, more macro-economic developments have become the most common. The focus today is then to update you and explain how financial sustainability concerns are caught in our decision-making process.
Growth in financial risk
Let's start with a few words about how our financial risks have become so big to start. It's a factor, debt will be built during the revival of each economic trip. Low energy levels will stimulate revitalization by & # 39; Encouraging households and companies to get a loan. Usually, the economic cycle is short enough that the dangers of these disadvantages are small.
In fact, the last 10 years have been far from normal. Levels of interest have been very low for a long time. The inevitable yield has been a strong demand for housing, house prices increase and a collection of housing debts of historic divisions. The result associated with financial risk has been the Bank's responsibility for several years. Indeed, housing debt in Canada was rising long before the crisis of global financial crisis, particularly as a result of a 15 year warranty, financial innovation and energy levels reduced.
In response to these developments, the federal government has implemented a series of additional macrocrudential policies – designed to ensure new loans are safer. In particular, with the new B-20 guidance that was introduced earlier this year, a loan from a new mortgage from federal regulatory centers was under the influence of a problem to ensure that lenders can handle increased levels flat. You will find a lot more detailed information about this and other sustainability issues on our Financial System Hub on a & # 39; bank.
Now, I am always listening to people who say that this test should not have been in housing markets that have not been done; exile. But the point of the change to B-20 is not to be & # 39; cool housing markets. The aim is to be & # 39; Increase the future sustainability of future home debts. There is a danger that all channels are in higher levels of interest, not just those in hot housing markets
However, there is undoubtedly the combination of these stress tests, higher levels of interest and housing policies implemented by regional and urban governments; affecting family loans. We see much less mortgages being deducted from debt ratio to income over 450 per cent. And credit data that represents a mortgage loan growth has slower this year to just over 3 per cent. At this point, the total debt ratio is likely to establish a central decline.
In the case of financial policy position it is essential to influence the effects of these policies. We need to know how much the decline in credit growth is due to higher levels of interest, rather than the other policies. How big is the impact of high levels of interest in housing costs? And how are different macrocrudential policies, including B-20 guidance, and & # 39; impact on lending and homekeepers' behavior?
Clearly, there is no way to get detailed answers to these questions. But we need to understand how improvements in the financial system affect the real economy and our future dangers. I talked about this topic almost four years ago in a speech at the West University. I talked about the idea of developing a major crest – an utopian economic model that showed how the financial system would be; affecting the economy and the other, and helping to & # 39; Delivering our control order.
We may never reach that utopia. But the good news is that we have made great progress. Give me three important developments.
Initially, a new concept developed at the International Monetary Fund – becoming at risk – is now used by staff; Bank to help us to understand the links between the financial department and the real economy. It demonstrates the increase in financial risks and the dangers of economic growth related to them. So, when levels of interest are thought to have changed, we can estimate the two normal direct effects on the economy, and the indirect effects through the financial risk channel. The growth-at-risk frame is not a simple logo, but it gives us a harder way to play; Think about financial problems within the risk management policy framework.
Secondly, we have updated our key economic model to include housing debt collection and so on; assume that the economy is more aware of moving rates of rates when high levels of debt. It also includes a & # 39; connection between debt to collecting and rising house prices. These are important steps to help us to understand the impact of these risks on the economy.
Third, bank staff work with new microwave sources to deepen our understanding of higher levels of interest; affecting mortgage owners. We now have access to anonymous data at the individual loan level that dates back to 2014, and covers around 85 per cent of mortgage loans over this period. This includes information about the extent of mortgages, housing income, the level of interest at the beginning, the mortgage period and the period of repossession.
This data allows us to work out how homes are more likely to influence housing through the mortgage renewal round. By estimating the impact of levels of increased interest in monthly household costs, we can predict how to affect the costs of other purchases as well.
So far, this improved framework has been a great achievement for our researchers. However, it is important to remember, so far, most families have been recovering at mortgage rates that are very similar to the rates they have signed for five years back. As we continue, people will be able to. appear higher when they are upgrading, and we will learn more about how people change.
Many of the households are obviously tough to change because their mortgages are reinstated and levels of interest are rising. However, these changes will not be much more challenging than if there is a serious economic impact, especially if financial risks are easy to continue to grow without.
Now, the responsibility of household spending is roughly anticipated as expected; giving us greater confidence that we understand what's going on; happening in the economy. But lenders and lenders continue to change rates of interest and new mortgage rules. So, we look closely at a number of trends in mortgage markets. For example, the department of mortgages that come outside of federal sovereignty, including private loans and credit unions, arises. These lenders are not subject to a formal formal estate test. We saw an increase in the proportion of mortgages provided by private lenders in the Toronto region, although we do not have this type of data for cities outside Ontario.
We also found a larger share of outstanding debt lenders including variable mortgages rate. In doing this, they are doing it. reducing their debt service liabilities because, as a rule, the degree of interest in a mortgage is a variable level below a fixed-level mortgage. This will give money for a & # 39; cost or save in & # 39; short term, but allow lenders to increase in interest rates in the road. Despite this, the stress test is & # 39; Encourage us that these loans can guide much higher pay, if needed.
In the summary, although the quality of a new loan has come forward, the mortgages stock is very high. Over time, these mortgages should be so dangerous because they are paid slowly. However, this risk will continue for many years.
It is well related to housing debt collection such as developments in housing markets. Everyone speaks about this issue – it is not surprising when you see that the prices of that house in the Toronto area are almost 40 per cent higher than they were three years ago. In the Vancouver area, the increase has been even larger, about 50 per cent. Outside these two areas, the average home price has risen just 5 per cent over the same three years.
In order to be clear, there are basic issues on moving house prices in Toronto and Vancouver. There is a strong population and growth in housing demand. The cost of several installments, such as construction and improvement fees, has also increased. At the same time, there are few provisions in other policies and factors in both locations. If provision is not expanded in a strong position; request, you have a trap for price increases.
Accordingly, it was clear to us that the growth of growth was increased by moderate activity, especially in 2016-17. Some customers accelerated their purchases, were encouraged with fear they would be priced out of their & # 39; market if they were waiting. There were others, most investors, who, Purchasing an estate is expected to have prices going up. This is important, because when mid-term activity is imposing higher prices, economic shock can stimulate sharp decline. Anyone who remembers a housing market in the early 1990's in Toronto and Vancouver will be a " understand this point. And such an impact has been increased when homeowners are very grateful.
The Bank is at the main level of raising a policy interest five times over the past. last half year, with 125 foundations in total. And I heard from some of the Canadians, later, who are concerned about the impact of this level increase in housing prices. However, according to the associated impact of regional and urban housing housing and which affirms macrocrudential policies – not to describes high quality house prices for Canada as a whole now growing at an annual level of about 2 per cent. It seems to me that this decline in much more important house prices inflation is affordable for current home-based buyers than the interest rate movements we have seen. The basic economic laws tell you that the steps for promotion provision are the most effective way to support affordable pricing. And steps that increase demand, without increasing the same in supply, can make housing worse.
Talk about the increase in interest rates, a risk related to the financial sustainability of Canada that we have been doing; Looking closely that affects the levels of global interest. Given that Canada would usually include about 60 to 70 per cent of any increase in the output of global bonds, we would consider the adverse effects of our mortgage rates, even though there has not been a change in Canadian Bank policy level. This risk remains at the top of the mind, especially due to market fairness and market market in the last few weeks. Most spectators would have a & # 39; decided that the surprise that could be at risk due to the emergence of inflation from the United States, and the likelihood of a response arising from the US economy to fiscal stimulus. However, our vision continues to ensure that the US economy is fair to a more sustainable pace next year and to 2020 and that the inflation rate is expected to be very appropriate.
So give us a sum into the financial sustainability situation. The Governing Council has a & # 39; judge that the total level of danger to the Canadian financial system is about six months ago, when we published our Investigation of the financial systemSouth West New mortgage loan is more sound, and the growth of house prices has become fraudulent. Despite this, the stock of home debts will maintain a high home for years, and house prices have continued to rise in special markets. Our new growth-in-risk framework clearly shows that macrocrudential policies have been worked to reduce the risk of financial sustainability, and thus. Developing a risk management problem against cash policy.
Macroeconomic threats and inflation
Let me now turn to the macro-economy. As we said in October, the economy has been working near its capacity for over a year and has targeted inflation. Since October, there have been a number of important developments.
Initially, growing concerns have been on & # 39; hauling global economy. I note that our repository was a? Convener has already been evaluated for an economic level in 2019-20, but this would not lead us to a sustainable growth route and it would not be a matter of concern. Despite this, the main threat we are experiencing is; That vision today will continue to maintain trade stability between the United States and other countries, especially China.
Increase targets will trigger economic growth and its output. reduce productivity on both sides, and increase the risks of additional inflation – a mixture that we would use to digg. This combination is particularly challenging for money policy, as it attempts to trade between a & # 39; Excavating economic growth through lower energy levels and at the risk of inflation with higher levels of interest. Because it would appear that the effects on the economy would be structural, rather than being able to; travel, I have to believe that inflationary risks would be very important in the right trade war.
Importantly, the dangers around a two-dimensional world trade are. There is, there is growing evidence that trading activities have already been in place; negative negative effects. But as media dealers we can not focus on the worst situation. It is the danger that threatens the United States and China to; come to words, and there is a new build well in the world economy. This weekend this weekend in Buenos Aires was very encouraging on this front. So, we'll continue to & # 39; emphasizing both aspects of the case.
Regarding the Canadian economy, it is fair to say that the data released from our MPR in October has been on the bankruptcy side. Although GDP data for the third verse was close to what we expected in general, it did not; It is the foundation of growth, and the economy is not just going into the fourth quarter than we would; believe.
Although recent data from the housing sector is worse than expected, we believe that this has resulted in a major change in new build from single-sized households for multiples, and this change has be far beyond the construction of housing that started earlier this year. Population and employment growth, and therefore a fundamental housing demand, are still strong. Growth belief has also been stable, and all of us support our view that the market is stable.
Business investment dropped down in the unexpected third quarter. We were marked earlier this year, and it seems that there would be an uncertainty about the NAFTA's future; keep investment decisions. It is now showing that a & # 39; This effect was very strong during the summer, when the roof was uncertain. The delay in the Trans Mountain Pipeline project was the next major campaign that was going on. hindering business.
CUSMA signage is likely to support its reimbursement in investment, especially in terms of continuing capacity constraints, although governments still need to grant the agreement. In addition, government tax changes recently announced will result in increased consolidation in investment. This would also suggest continued growth in exports, which has been strongly supported by foreign countries, but is limited by strict capacity.
In its latest GDP distribution, Canada's Statistics have changed its historical estimates of economic growth. Most of these reviews are & # 39; related to moving into an economic structure beginning in 2015, as the economy was changing to reduce the decline in oil prices. It may be surprising that developments in 2015 could have an impact on our economic idea still in 2018, do. It is now believed that the GDP level today is almost 1 per cent lower than expected. The impact of this review will have an adhesion perspective depending on the level of system needed and the level of economic supply or capacity, thus affecting the estimates of # 39; we have a & # 39; gap between both. We say more about this in the MPR in January, once our analysis is complete.
Much of the Management Council debate was oil-focused. Global oil prices are well below the strategic assumptions made in our MPR in October, especially due to supply forces. There is also an important coverage of worry about global economic growth development, and # 39; Increasing trade initiatives, with the impact on future oil demand.
There is a major oil supply source as it was back in 2014: the United States. For a comment, the world will produce about 100 million barrels of oil per day. Back in 2008, it was about 7 million barrels per day; in the US production. By 2014, the hunting outlet had been pushing that up to 12 million. Today, there are more than 15 million barrels today, more than the doubling of 2008. This is 2 million more than just a year ago, and the US's export of oil rises with the same size over that time.
The US developments provide Canadian representation – we will We do about 5 million barrels per day and we'll get more than 3 million. Global oil prices have a direct impact on Canada, as we know our own knowledge in 2015-17. This will affect each representative, in the east and in the west. Although the Canadian economy was largely due to changes to lower oil prices by mid-2017, changes to cost structures, and salaries and employment in oil production departments, have continued. Indeed, the oil and gas sector in the Canadian economy has decreased from 2014, from around 6 per cent to about 3½ per cent today.
The recent decline in global oil prices has been expanded in West Canada, since the decline in our heavy oil, Western Select Select, has been expanded to the table. This is largely due to transport constraints, but it has been made easier this autumn with the closure of maintenance in some of the leading US pipers. From October's decision, the massive oil declines have declined due to the fact that US sprayers are back online. However, in the last few weeks, the discount is also on price distribution for Canada's lightweight oil, Edmonton Par, as the stored store stored at registry levels. The Alberta initiative will be to reduce output reduction and increase the capacity of a rail to help reduce its output. preserving the reasonable, and more pressure on piping would definitely help long-term.
Although we did not make enough new economic strategy for a decision yesterday, we will do this between the moment and our next decision in January. It is already clear that there is a panoramic change to the west of Canada, and will have a meaningful influence on the Canadian macroeconomic. That said, since the consolidation of the energy sector since 2014, the impact of lower oil prices on the whole of the Canadian economy, a dollar for the dollar, should be less than in 2015.
Drawing up, as I said, has happened a lot from our October MPR. But we do not remember that these developments have come to the bottom of a low unemployment level and a near 40-year inflation, consistent with an economy that has been working near ability. We will assess all of these new developments in our new projections in MPR in January.
The Governing Council decided yesterday that levels of interest rates are currently appropriate for the period. And, focusing on all these developments, we Continue to judge that the level of policy interest must be increased in a neutral area of somewhere in the # 39; community between 2.5 and 3.5 percent-to achieve the tax target. The speed of this process, usually, will be kept consistently according to the data. We will continue to measure the levels of higher spending and housing interest, and exploring global trade policy developments. The sustainability of the oil price, such as the development of business investment and the economic capacity of our economy, will also influencing our conclusions about the future position of future financial policy.
It is time for me to come to an end. I hope that my perspective will show you how financial liability is to come into our financial policy discussions. We have made progress by thinking about these problems and your other problems and their. Understand the dangers that they stand for the economy. I have also tried to give you an awareness of the multi-topics that we are actively involved in; managing the macroeconomic risks facing the Canadian economy. We will continue to manage these risks because we are going to; follow our order to control inflation and increase the economic and financial benefits of Canadians.
I wish you all your holiday seasones very happy and everything in the & # 39; new year.
I would like to thank Don Coletti for his help in preparing this speech.