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This issue of the Financial System Review reflects the Bank’s judgment that household indebtedness and housing market imbalances–the most important vulnerabilities for the Canadian financial system–have moved higher over the past six months. However, the financial system remains resilient, and macroeconomic conditions continue to improve. Other vulnerabilities discussed in this FSR are fragile fixed-income market liquidity and the capacity of an interconnected financial system to mitigate cyber threats.

The authors develop a projection model of the euro area and the United Kingdom. The model consists of two country blocks, endogenous to each other via the foreign demand channel.

The Bank projects that the economy will grow by 2.1 per cent in 2012, 2.3 per cent in 2013 and 2.5 per cent in 2014. The economy is expected to reach full capacity in the second half of 2013.

Inflation remained low for the seventh consecutive year, and the inflation target range of 1 to 3 per cent was extended to 2001.

The financial system makes an important contribution to the welfare of all Canadians. The ability of households and firms to confidently hold and transfer financial assets is one of the fundamental building blocks of the Canadian economy.

The Financial System Review is one vehicle that the Bank of Canada uses to contribute to the strength of the Canadian financial system. The Developments and Trends section of the Review aims to provide analysis and discussion of current developments and trends in the Canadian financial sector.

Although there has been some improvement in conditions over the past several weeks, strains in global credit markets have broadened since December.

FSR Highlights - June 2008

Errata: Some factual errors in the June report "Bank of Canada Oversight Activities during 2007 under the Payment Clearing and Settlement Act" have been corrected. They concern (i) clarification of the U.S. Federal Reserve as lead overseer of CLS Bank and (ii) the steps taken by CDS on 14 August 2007 to assist issuers and participants holding defaulted ABCP.

Inflation can affect both the dispersion of commodity-specific price levels across locations (relative price variability, RPV) and the dispersion of inflation rates (relative inflation variability, RIV). Some menu-cost models and models of consumer search suggest that the RIV-inflation relationship could differ from the RPV-inflation relationship.

Senior Deputy Governor Carolyn Wilkins discusses the financial stability risks associated with slow growth and low interest rates, and explores strategies to mitigate them.

Guided by a macroeconomic model in which non-energy commodity prices are endogenously determined, we apply a new factor-based identification strategy to decompose the historical sources of changes in commodity prices and global economic activity.