2 As evident in the recent crisis, uncertainty about the solvency of financial institutions causes markets to become illiquid, and illiquid markets can cause otherwise solvent institutions to become insolvent. However, while solvency and liquidity are related, the responsibility for each ultimately falls to different agents.
First, inflation is too high, and more people are getting more worried that high inflation is here to stay. We cannot let that happen. Restoring price stability—low, stable and predictable inflation—is paramount. Second, the Canadian economy is overheated. There are shortages of workers and of many goods and services. Demand needs to slow so supply can catch up and price pressures ease.