Bank of Canada keeps an eye on those with too much debts. Should we expect another round of mortgage rules tightening?

According to the governor of the Bank of Canada Tiff Macklem, coping with the financial risk from the COVID-19 pandemic is extremely critical now. The BoC keeps an eye on the real estate market amid historically low interest rates.

“In addition to it, we’ll also watch for signs that speculation at real estate markets is pushing prices higher”, – he noted. “We’ll watch whether homebuyers are taking on too much debt relative to their income.”

“However, in case too many Canadian households become dangerously over-leveraged, policy-makers have certain macroprudential tools to use in response. For instance, mortgage-interest stress test shows how effective it could be.”

During the pandemic, Canadian companies and households have been given financial help, e.g. deferrals on mortgage payments, a decline in the BoC’s interest rate, and billions in federal aid programs.

Nevertheless, such measures may in fact represent a new risk in the nearest future.

Macklem warned about the pressure on household and business from growing debt.

Today’s low interest rates may heat up the real estate market, which was already hot before the pandemic. Moreover, historic federal spending will also increase the national debt.

Even the BoC’s promise to keep its key lending rate at 0.25% until a full recovery could create vulnerabilities for the national financial system.

“The situation would have been much worse without the fiscal and monetary policy actions measures,” –  Macklem noted.

“Those actions were necessary, but they will inevitably make the economy and financial system more vulnerable to economic shocks in the future.”

According to Macklem, the central bank will keep a close eye on how many companies and households can’t manage their credit payments. In his opinion, the government may tighten the mortgage stress-test in case the market overheats.

CIBC senior economist Royce Mendes believes the fact that Macklem mentioned the stress test and didn’t say a word about adjusting the BoC’s monetary policy is important.

“It should reinforce the view that the central bank will keep its key lending rate unchanged for the next few years, even if it increases vulnerabilities,” – he noted.

“In that case, the Bank will probably expect other policy-makers to manage the growing risks, as increasing rates prematurely will slow down the recovery.”