On May 8, 2025, the Bank of Canada released its Financial Stability Report. Key concerns are as follows:
In the short term, the unpredictability of trade policy could cause further market volatility and a sharp repricing in assets, straining liquidity. In an extreme case, market volatility could turn into market dysfunction.
In the medium term, a prolonged global trade war would have major negative implications for economic growth, threatening jobs and incomes. Some households and businesses (especially those in trade-related sectors) may be unable to keep up with their debt payments. If loan losses occur on a large enough scale, banks could cut back on lending in response, exacerbating the economic downturn.
If the trade war causes a large spike in volatility, leveraged hedge funds might rush to sell their holdings, straining liquidity across core markets – most notably in the market for Government of Canada bonds where they have a large presence.