High household debt and elevated housing prices have become bigger vulnerabilities in the past year, but the economy can still handle the rising interest rates needed to tame inflation, Bank of Canada governor Tiff Macklem said Thursday.
“We think the economy needs higher interest rates, and it can certainly handle higher interest rates,” he told a news conference in Ottawa discussing the central bank’s latest financial system review.
The review notes high debts and home prices have increased the downside risks to overall economic growth, as rising rates meant to counter inflation increase the chance of households having to divert consumption towards debt repayments.
However, Macklem emphasized the overall financial health of Canadian households, as the average net worth increased by about $230,000 during the pandemic, and the focus of the central bank on reducing inflation over concerns of how higher rates may affect the housing market.
“Our primary focus is getting inflation back to target. You know, monetary policy is not housing policy,” he said.
“The increases in housing prices we’ve seen have been unsustainably elevated and we are expecting to see some moderation in housing activity and frankly, that would be healthy.”
He said that while the housing market is an important part of the economy, and the bank is watching the dynamics closely, the bank needs to slow demand in the economy and bring it in line with supply.
The bank has indicated, and Macklem repeated Thursday, that it may have to move its key interest rate to upwards of three per cent to bring inflation back on target. He said the bank may need to “move more quickly, may need to take a larger step” to avoid inflation becoming entrenched.
The Bank of Canada raised its key interest rate target by half a percentage point last week to 1.5 per cent, a move that prompted the big commercial banks to raise their prime rates.
The report Thursday noted that increasing rates will put strain on mortgage holders, especially those who bought into the housing market during the pandemic as an increasing number of households have stretched themselves financially to purchase a home.
To illustrate the risks, the central bank ran a hypothetical scenario where five-year variable- and fixed-rate mortgages taken out in 2020 and 2021 renewed at median rates of 4.4 per cent and 4.5 per cent, respectively, in 2025 and 2026.
In this scenario, households that took out a fixed-rate mortgage during that period would see a median increase in their monthly payment of $300 or 24 per cent, while high loan-to-income ratio borrowers with a fixed-rate loan would see a median increase of $490 or 26 per cent.
However, those with variable-rate mortgages would face even larger increases with a median increase of $720 or 44 per cent in their monthly payment at renewal. High loan-to-income ratio borrowers who opted for a variable-rate loan would see a median increase of $1,020 or 45 per cent in their monthly payment.
Higher mortgage servicing costs mean less money to spend elsewhere which could have a negative hit on the overall economy, the report noted. Looking ahead to the first quarter of 2024, the trends have increased the probability of negative growth to 15 per cent, up by five percentage points compared to what it would have been had debt levels not changed during the pandemic.
Rising rates also increase the risk of a correction in the real estate market, which would erode equity and the ability for households to respond.
The report notes that the recent run-up in home prices, which gained about 50 per cent in the first two years of the pandemic, has been fuelled in part by increased buying by investors and the overall expectation that prices would continue to rise, both of which could “amplify” the decline in prices as the market reverses.
The real estate market has already started to cool since the bank has started raising its key rate, but the central bank said it’s too early to tell if it’s the start of a deeper, lasting decline.
The financial review noted that Canada’s banking industry could weather a downturn in both the housing market and overall economy. A stress-test where the economy declines 5.8 per cent over six quarters showed that while it would lead to sizable decline on bank capital buffers, the banks would still be broadly resilient.
The Bank of Canada noted in its review that other vulnerabilities to the financial system include cyber threats given the interconnected nature of the financial system, a risk that has increased from Russian aggression related to its invasion of Ukraine.
It said Russia’s invasion of Ukraine has also further complicated the transition to a low-carbon economy and increased the risks of a repricing of assets exposed to climate change.
But the key challenge for the bank remains high inflation rates, which Macklem said the bank hopes to reduce without pushing the economy into a recession despite the increased complexity of the challenges.
“Our objective is very much to to achieve a soft landing with inflation coming back to target, but it is going to be delicate and there are risks around that.”
This report by The Canadian Press was first published June 9, 2022.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets also climbed higher.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
This report by The Canadian Press was first published Sept. 13, 2024.
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in the base metal and energy sectors, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 172.18 points at 23,383.35.
In New York, the Dow Jones industrial average was down 34.99 points at 40,826.72. The S&P 500 index was up 10.56 points at 5,564.69, while the Nasdaq composite was up 74.84 points at 17,470.37.
The Canadian dollar traded for 73.55 cents US compared with 73.59 cents US on Wednesday.
The October crude oil contract was up $2.00 at US$69.31 per barrel and the October natural gas contract was up five cents at US$2.32 per mmBTU.
The December gold contract was up US$40.00 at US$2,582.40 an ounce and the December copper contract was up six cents at US$4.20 a pound.
This report by The Canadian Press was first published Sept. 12, 2024.
