The Bank of Canada says the Canadian economy would have been in a solid spot right now if it wasn’t for U.S. President Donald Trump’s trade war, and it is worried that high levels of uncertainty could soon create a “dysfunctional” financial market.
The bank’s 2025 Financial Stability Report, released Thursday, said Canadians with a mortgage have managed their debt better than expected throughout 2024 while interest rates significantly dropped since June.
Meanwhile, insolvency filings by businesses have also fallen substantially, according to the report.
Those without a mortgage, however, are showing bigger signs of financial stress — though rates of arrears on consumer credit products remain below historical averages, the report stated.
The bank said that, overall, Canada’s financial institutions have not come under stress.
“The country’s financial system has faced unprecedented shocks in recent years, and it has proven resilient,” Bank of Canada governor Tiff Macklem said in prepared remarks.
“Now the Canadian economy and financial system face a new threat,” he went on to say. “U.S. trade policy has taken a dramatic protectionist shift. Tariffs and uncertainty have sharply reduced prospects for global economic growth. And financial markets have been rocked by chaotic policy announcements and reversals.”
The bank is increasingly concerned that Trump’s trade war will cause a “disorderly” market sell-off in the near-term, harming Canadian households and amplifying the risk of an economic slowdown.
The report cited recent bouts of “extreme market volatility,” particularly when investors dumped stocks and even traditionally stable U.S. Treasury bonds following Trump’s announcement of global “reciprocal” tariffs on April 2.
“Government bond markets are the foundation of the financial system. They need to function smoothly for other markets to work,” said senior deputy governor Carolyn Rogers in prepared remarks.
“If the trade war causes a larger spike in volatility than we have seen so far, leveraged hedge funds might rush to sell their holdings. That could strain liquidity across core markets, increasing stress throughout the financial system,” she added.
The bank said it is monitoring signs of financial stress in Canada’s financial system, and it is working closely with federal and provincial financial authorities to address potential emerging issues.
This is a developing story.
