Economy vulnerable to rising interest rates, hints at Bank of Canada

Although resilient after a year and a half of the pandemic, the Canadian economy remains fragile and could be undermined by a rise in interest rates, the Deputy Governor of the Bank of Canada suggested on Tuesday, two weeks before the next decision on the key rate.

Speaking to the Ontario Securities Commission, Deputy Governor Paul Beaudry recalled that the pandemic has changed the country’s financial landscape.

Even before the arrival of COVID-19, in 2019, one in six Canadian households had a debt-to-income ratio exceeding 350%, he recalled.

Since then, many households have been able to improve their situation. “On average, Canadians have saved an additional $ 8,300 since the start of 2020,” said Beaudry, attributing this improvement to financial assistance from the government and to the fact that it was more difficult to spend, confinement requires.

In doing so, many households have been able to pay off consumer debts and accelerate their mortgage repayments, while the number of personal bankruptcies has reached an all-time low.

On the other hand, the real estate escalation that resulted from the pandemic, leading to record prices for homes month after month while buyers took advantage of extremely low interest rates, is weakening the recovery.

“As many households have taken advantage of the long period of historically low interest rates to take on heavy debt, the economy is probably now more sensitive to any increase in borrowing costs,” warned the deputy governor. .

“The debt that households have accumulated in a context of low interest rates will not be repaid anytime soon,” fears Mr. Beaudry, especially since “the gap between supply and demand which has increased house prices during the pandemic are still there ”.

“Although Canadian banks are resilient, these vulnerabilities could exacerbate the economic impact of a significant rise in interest rates or a large negative shock,” Paul Beaudry concluded during his presentation.

The Bank of Canada lowered its key rate to 0.25% at the start of the pandemic to stimulate the economy. The key rate has never risen since, despite a galloping increase in inflation which exceeds 5% over one year in Quebec, according to the latest data from Statistics Canada.

The next key rate update is expected on December 8. However, during the last update in October, the Bank of Canada warned that it does not plan to raise its key rate before the second or third quarter of 2022.

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