carolyn rogers : financial stability in a world of higher interest rates remarks by ms carolyn rogers, senior deputy governor of the bank of canada, at the advocis vancouver, vancouver, british columbia, 9 november 2023. * * * introduction good morning. i'd like to start by thanking advocis vancouver for inviting me here today. and thank you for the kind introduction. the bank of canada's main job is to control inflation, but we also play a critical role in promoting the stability of the canadian financial system. each spring, we publish the financial system review ( fsr ), which outlines risks and vulnerabilities that could test the system's resilience. we also update canadians on financial stability issues in a speech every autumn, as i am doing today. given the forceful response by central banks since early 2022 to get inflation under control, this year's fsr focused on the adjustment of the financial system, globally and in canada, to the large and rapid increase in interest rates. 1 since the fsr, we've seen more evidence that the financial system is continuing to adjust. but there is more adjustment to come as past interest rate increases work their way through the system. your view of current interest rates probably depends, at least in part, on your age. on one hand, if you had a mortgage in the 1970s or early'80s, today's rates may not seem very high. on the other hand, young people buying homes today are facing some of the highest borrowing costs they've ever seen. in any case, we've all been through a lengthy period of very low interest rates. before rates started rising last year, they had been unusually low for a long stretch of time that started during the 2008a€ “ 09 global financial crisis. and it may be tempting to believe the low rates that we all got used to will eventually come back. but there are reasons to think they may not. adjusting to a world of higher interest rates would be a big change for everyone in the financial system - from governments, businesses and households to financial planners and investors. financial stability and resilience are all about adjusting to changegradually and proactively. adjusting early and bit by bit lowers the risk of having to take more abrupt and possibly destabilizing steps later. so today i'm going to talk about why it's important for the stability and resilience of the financial system that people plan

or region, to another. some of these issues are particularly relevant in a canadian context, and i will return to them later. the key point i want to make here is that economic policies and structural reforms that enhance flexibility make it easier to withstand shocks and to make adjustments. and this helps to maintain output at the economy's production potential. put differently, strong, well - functioning domestic markets for goods, services, capital, and labour are essential to the economic well - being of canadians. in addition, with national economies so closely connected these days, actions by individual countries to increase flexibility translate into an even greater cumulative benefit for the world economy. indeed, the greater the number of economies that are flexible enough to adapt to changing circumstances, the stronger and more sustainable world economic growth will be. so what are the policies that promote flexibility and thus position us to take advantage of the opportunities offered by globalization and to cope with unforeseen shocks that are sure to come our way? policies that promote economic flexibility in canada – and in many other countries – better macroeconomic management has been instrumental to the good economic performance of recent years. specifically, a monetary policy focused on low, stable, and predictable inflation has helped canadian businesses read price signals more clearly, respond to relative price changes more promptly, and generally allocate production resources more efficiently. and this, together with the bank of canada's symmetric response to deviations from the 2 per cent inflation target has contributed to solid and more stable economic growth over the past decade. a floating exchange rate - which is the other key component of our monetary policy framework – has also provided an important stabilization mechanism for the canadian economy. movements of the exchange rate provide clear price signals that help speed up adjustment to shocks with lower overall economic costs than if the exchange rate did not move. with a fixed exchange rate, it takes longer for price signals to be recognized, and the adjustment primarily takes place through changes in domestic prices and wages, at the cost of significant variability in output and employment. it is also important to recognize that it is simply not possible for a central bank to successfully control both the domestic and external values of its currency at the same time. we have only one instrument – our policy interest rate – and so we can have only one target. thus, with inflation as our target, we naturally operate with a floating currency. a sound fiscal policy, focused on reducing public sector debt levels relative to the size of the economy, has also contributed significantly to