First, some core buyers of senior tranches (structured investment vehicles, Canadian non-bank asset-backed commercial paper (ABCP), balance sheets of large banks) will not return. This alone will shrink the market substantially. Some of this shortfall in financing capacity will be replaced over time with on-balance sheet credit risk, though the prospect of leverage ratios will limit future buying by banks of senior tranches.
The combination of low global growth, domestic challenges further hampering the growth outlook, rising wage settlements, a weaker rand and higher current account deficit – makes for a very difficult combination of factors to consider when making policy decisions. Olivier Blanchard in 2006 presented a paper entitled “Monetary Policy; Science or Art”.