Number of Highly indebted Households on the Rise As COVID-19 Aid Winds Down says Bank of Canada

A senior official at the Bank of Canada says the number of highly indebted households appears to be back on the rise as pandemic aid from governments winds down.

In a speech today to a conference held by the Ontario Securities Commission, deputy governor Paul Beaudry says unprecedented federal aid and restrictions that limited where consumers could spend helped bolster the finances of Canadian households during the pandemic.

But now he says that vulnerabilities linked to elevated household debt appear to be on the rise again after a slight pause.

Beaudry says bank calculations suggest the share of highly indebted households should this year surpass the pre-pandemic peak recorded in 2019.

He partly points to a long period of historically low-interest rates as a reason why households took on more debt.

It’s why he warns the economy is likely now more sensitive to any increase in borrowing costs.

The news comes as the Bank of Canada is getting closer to raising interest rates says the central bank’s governor.

The Bank of Canada will not raise its benchmark interest rate until the slack in the country’s economy is absorbed, which has not yet happened but is getting closer, Governor Tiff Macklem said in a newspaper opinion piece on Monday.

Macklem also noted that while inflation risks have increased – driven by pandemic-induced demand shifts, supply disruptions and higher energy prices – the central bank continues to view the recent dynamics as transitory.

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer,” Macklem wrote in an op-ed for the Financial Times newspaper.

He added that the central bank’s policy framework – a flexible inflation target focused on the two percent midpoint of a 1-3 percent control range – means that Canadians can be confident it will keep inflation under control while supporting a full recovery.

“What our resolve does mean is that if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust. Our framework enables us to do just that,” Macklem said.

Inflation has soared in recent months as countries around the world have rebounded from the pandemic, putting pressure on global supply chains. Canada’s headline inflation rate rose to 4.4 percent in September, the sixth consecutive month above the bank’s targeted range.

The Bank of Canada signalled last month that its first rate hike could come as soon as April 2022, though money markets are betting on a hike in March, with five in total in 2022.

The Canadian dollar was trading 0.2 percent higher at 1.2517 to the greenback or 79.89 U.S. cents.


This post is also available in: Tiếng Việt

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