The economy is weak at rising interest rates, hints at the Bank of Canada

Despite being resilient after a year and a half of the pandemic, the Canadian economy is fragile and could be weakened by rising interest rates, the Bank of Canada’s deputy governor said Tuesday, two weeks before the next decision on the key rate. .

Speaking to the Ontario Securities Commission, Deputy Governor Paul Boudreau recalled that the pandemic had changed the country’s economic landscape.

He recalled that even before the advent of Kovid-19, in 2019, one in six Canadian families had a debt-to-income ratio of more than 350%.

Since then, most households have been able to improve their condition. “On average, Canadians have saved an additional $ 8,300 since the beginning of 2020,” Boudreau said, adding that sanctions were needed because of the financial difficulties and spending from the government for this improvement.

In doing so, many families were able to repay consumer loans and expedite their mortgage repayments, while the number of personal bankruptcies reached an all-time low.

On the other hand, the real estate boom that resulted from the epidemic has led to record prices for monthly homes, while buyers have taken advantage of much lower interest rates, weakening recovery.

“As many families have long benefited from historically low interest rates to borrow heavily, the economy is now more vulnerable to any increase in borrowing costs,” the deputy governor warned.

Mr Budree fears that “debt accumulated by families in the face of low interest rates will never be repaid”, especially as “there is still a gap between supply and demand that has pushed up house prices during the epidemic”.

“While Canadian banks are resilient, these vulnerabilities could exacerbate the economic impact of a significant increase in interest rates or a major negative shock,” Paul Boudrey concluded.

Bank of Canada cut its key rate to 0.25% at the start of the epidemic to stimulate the economy. According to the latest data from Statistics Canada, despite a 5% increase in inflation in one year in Quebec, the key rate has never risen.

The next key rate update is expected on December 8. However, during the last update in October, the Bank of Canada warned that it had no plans to raise its key rate before the second or third quarter of 2022.