Central bank to 'stress test' for risk
08 January, 2009

The Canadian Press/Reuters

January 8, 2009 at 1:56 PM EST

TORONTO — The Bank of Canada is considering more monetary stimulus to rejuvenate the Canadian economy and is working on an “early warning system” to identify future risks to Canada's financial system.

That's according to Pierre Duguay, the central bank's deputy governor, who spoke to the Toronto chapter of the Risk Management Association today.

Mr. Duguay says the Bank of Canada will continue to monitor economic and financial developments ahead of its next interest rate announcement on Jan. 20, and its main goal is to maintain the national inflation rate at two per cent.

It is expected the bank will lower interest rates again to stimulate the economy.

Mr. Duguay says the current financial crisis exposed flaws in financial risk management systems both in Canada and around the world.

He says in the future the bank plans to perform “stress tests,” tests that could have rung alarm bells about problems with highly leveraged structured products that led to the current crisis.

Mr. Duguay hinted the bank would continue to lower interest rates this year but gave no indication of how deep the cuts would be as the global recession hits the economy.

He said the bank continued to monitor developments in world markets to decide its next moves amid market expectations of a rate cut on Jan. 20.

“We will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2-per-cent inflation target over the medium term,” Mr. Duguay said.

He said the Canadian economy is now in a recession, a result of the deeper-than-expected global downturn and severely strained financial markets.

But the domestic economy's recovery will be helped by the depreciation of the currency and the 1.5-percentage-point reduction in the bank's key overnight lending target since last October, he said.

Markets widely expect another rate cut in January but are divided over how big the reduction will be, with some expecting a quarter-percentage-point cut and others a half-point reduction.

Mr. Duguay's comments largely repeated those in the bank's Dec. 9 rate announcement.