Bank of Canada says financial system is at risk from rising rates

(Bloomberg) – The Bank of Canada’s No. 2 official said the country’s financial system would be able to weather rising stability risks stemming from rising interest rates and inflation that are causing difficulties for many households.

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In prepared remarks for a speech in Ottawa, Senior Deputy Governor Carolyn Rogers said risks to Canada are mitigated by financial reforms since the 2008-2009 financial crisis that have bolstered capital and liquidity. The country should also not be hit by a “severe” economic downturn that generates major job losses, she said.

“There is good reason to believe that the system as a whole will be able to weather this stressful period and remain resilient,” Rogers said.

Rogers pointed out how the sharp rise in interest rates can cause financial stress for Canadians who recently bought a home with variable rate mortgages. She said around 670,000 new mortgages have been taken out at variable rates since the start of the pandemic and around 50% of all loans since mid-2021.

This has left many Canadians vulnerable to rising borrowing costs. In a research paper released with the speech, the Bank of Canada estimated that about 50% of variable-rate and fixed-payment mortgages have reached the point where additional payments may be required. This represents approximately 13% of all Canadian mortgages.

Still. Rogers pointed to how Canada’s stringent mortgage stress test ensures that “Canadians could continue to pay for their homes when interest rates rise.”

In his speech, Rogers reiterated that the central bank was beginning to see its aggressive interest rate hikes begin to slow economic growth and ease price pressures, although “we still have a long way to go to bring back inflation to target.

Prior to the speech, traders were betting on about a one-third chance that policymakers would hike interest rates another 50 basis points in the next Dec. 7 decision. The overnight rate is currently at 3.75%, up 3.5 percentage points since March.

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Don F. Davis