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09
May
May
In its annual review of the financial system, the Bank of Canada reassured Canadians that they are adeptly managing increased borrowing costs. The central bank emphasized that households are proactively adjusting to higher interest rates. This indicates a robust financial system that remains resilient despite economic uncertainties.
Senior Deputy Governor Carolyn Rogers underscored the adaptability of households. She noted that while mortgage payments have risen for about half of the country’s mortgages. Households have higher wages and savings to cushion the impact. Rogers stated, “Overall, the evidence suggests that households have the flexibility to continue servicing their debt at higher rates.”
Savings Accumulation During the Pandemic
One of the key findings of the review was the accumulation of liquid assets by households and businesses during the pandemic. This accumulation of savings has provided a buffer for many Canadians, allowing them to navigate through periods of financial uncertainty. Additionally, the review highlighted a growing trend among mortgage borrowers with fixed-payment flexible rate mortgages. They are making lump sum payments ahead of renewal, further strengthening their financial position.
Challenges for Non-Mortgage Borrowers
While mortgage borrowers appear to be adapting well to higher rates, the review also pointed out challenges faced by non-mortgage borrowers, particularly those with credit card and auto loan debt, according to Barron’s report. The proportion of individuals falling behind on payments has returned to or surpassed pre-pandemic levels. This indicates ongoing financial strain for some segments of the population.
Concerns Over Asset Valuations and Business Insolvencies
The Bank of Canada expressed concerns over ‘stretched’ financial asset valuations in US and Canadian equities and corporate bonds. It warned that these valuations may not accurately reflect risks to the economic outlook. Additionally, the review noted a sharp increase in business insolvencies in recent months as pandemic-era loans expire. While some of this increase is attributed to a catch-up effect, higher rates and slower demand are also contributing factors.
Housing Affordability and Debt Levels
The review highlighted the ongoing challenges of housing affordability and high levels of household debt in Canada. Elevated home prices and borrowing costs have pushed housing affordability to its worst levels in decades. Over a third of new mortgages had debt-service ratios exceeding 25% by the end of 2023.
Outlook and Policy Implications
Looking ahead, Governor Tiff Macklem and his team face the task of balancing economic stability. They need to maintain continued vigilance against inflation. While the majority of economists predict a reduction in the benchmark overnight rate at the next meeting. The central bank emphasizes the importance of further progress on disinflation before considering rate cuts.
The Bank of Canada annual review provides valuable insights into the resilience of Canadian households amidst rising borrowing costs. While challenges persist, particularly for non-mortgage borrowers and in the housing market. The review highlights the adaptability of Canadians and the overall strength of the financial system. As policymakers weigh their decisions in the coming months, the review serves as a critical guide for navigating Canada’s economic landscape.
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