The Bank of Canada's (BoC)  bold policy response to the pandemic was needed but it will make the economy and the financial system more vulnerable to economic shocks, BoC Governor Tiff Macklem said on Thursday, as reported by Reuters.

Additional takeaways

"We came into the pandemic with a number of vulnerabilities; it seems certain we will exit pandemic with higher levels of government debt."

"Our policy path will eventually have an impact on financial system vulnerabilities; lower-interest-rate environment will require firms and pension funds to adjust."

"BoC will continue to assess the risk that credit losses could become large enough that banks need to tighten credit conditions."

"If this happens, the banking sector would go from being a tailwind to being a headwind; at present this risk appears to be well-managed."

"A full recovery will take a long time and many risks remain; it will be a long slow climb to get everybody back working at pre-pandemic hours."

"Major parts of the commodity sector face particular challenges; the longer the recovery, the greater the risk that cash flow issues could turn into solvency issues."

"Physical and financial risks from more frequent and severe weather events will almost certainly grow."

"If not appropriately priced and managed, these risks could cause losses for financial institutions and even threaten the stability of our financial system."

"Financial markets are functioning well, quantitative easing program is working, credit is flowing."

"Mortgage deferrals about to end, next few months will be crucial; the vast majority of those who received deferrals have returned to regular payments."

"We are watching for signs that housing markets are being driven higher by speculation; we are not back to frothy housing markets of 2016 and we expect bounceback to soften."

Market reaction

The USD/CAD pair largely ignored these comments and was last seen losing 0.05% on a daily basis at 1.3245.