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Bank of Canada polling of major investors found that a fiscal or monetary policy error is seen as the biggest risk to the financial system, and a potential inflation surge has become a greater concern than Covid-19, according to a report Monday.

The semi-annual Financial System Survey asked respondents to rank each of the three biggest systemic risks and and weighted the answers in an index with scores between one and three. On that basis, a policy error scored 0.85, up from 0.3 in the previous data.

Inflation risk scored 0.52, up from 0.13 last fall. Cyber attack was the second biggest risk with a score of 0.64, followed by inflation at 0.52. All of those factors came ahead of the pandemic, which declined to 0.48 from 0.64, and few on balance saw a danger from the housing boom.

While there was high confidence in the stability of the financial system, "respondents frequently mentioned the effectiveness of monetary and fiscal policy support and improved market liquidity as their reason for remaining confident," the report said. The survey was gathered from Feb. 22 to March 12 and had 56 responses.

Finance Minister Chrystia Freeland has pledged to press ahead with record deficit spending until the economy "punches" its way out of the pandemic, while sources have told MNI the BOC is likely to further taper QE this year without taking the more aggressive step of selling bonds back into the market.

Source: Bank of Canada

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