Bank of Canada Warns Trade War Risks Financial Stability

The Bank of Canada has issued a warning in its latest Financial Stability Report about the heightened risks to Canada's financial system stemming from the ongoing trade war with the United States, describing the U.S. trade policy shift as "dramatic protectionist". The bank highlighted that near-term effects could include increased market volatility and liquidity strains, with a risk of disorderly market sell-offs that may require governmental liquidity support. In the medium term, a prolonged trade conflict could lead to reduced economic growth, higher unemployment, and increased credit defaults, potentially causing banks to suffer greater losses and tighten lending, further exacerbating economic downturns. Despite these risks, the Bank of Canada affirmed the resilience of Canada's financial institutions, noting that most mortgage holders remain capable of servicing higher payments and that the system has weathered recent economic shocks. The uncertainty surrounding tariff policies makes it challenging to predict the full impact, but the bank remains vigilant in monitoring financial stress indicators and credit conditions. Overall, the trade war poses the greatest threat to both the Canadian economy and financial stability as noted by Governor Tiff Macklem and other officials.