Continuing the upbeat tone set last week when the central bank signaled more rate hikes were coming, the bank said slowing credit growth among households and higher incomes have lessened vulnerabilities since its November report, but they remain elevated and will persist for some time.
"The two main vulnerabilities we have been watching closely are showing continued signs of easing, which is encouraging," Governor Stephen Poloz said in a statement. "Combined, the impact of higher interest rates and the changes to the mortgage guidelines have reduced credit growth and improved the quality of new lending."
Key risks facing Canada's financial system include a severe nationwide recession, a house price correction in overheated markets and a sharp increase in long-term interest rates driven by higher global risk premiums, the bank said in its Financial System Review.
It said the risk of a recession, possibly triggered by negative growth in China or a spike in protectionism that douses global growth, is elevated but has decreased since the November review, while the risk of a housing crash in Toronto and Vancouver remains moderate, and the risk of a spike in long-term rates is moderate but increasing.