Bank of Canada: National financial system is ready for higher interest rates

According to the Bank of Canada Senior Deputy Governor Carolyn Rogers, the national financial system is ready to withstand intensifying risks coming from higher interest rates and inflation that bring difficulties to many Canadian households.

In her recent speech in Ottawa, Rogers noted that risks for Canada are softened by financial reforms made since the 2008-09 financial crisis that increased capital and liquidity buffers. Canada is also not expected to face a “severe” economic downturn causing large job losses.

“We have solid reasons to believe that the financial system will be able to withstand this period of stress and keep its resilience,” – she added.

Rogers explained how the sharp interest rates hikes may lead to financial stress for Canadians who have recently purchased a property with variable-rate mortgages. She said almost 670,000 new mortgages were taken with variable interest rates since the beginning of the pandemic and almost 50% of all the loans since mid-2021.

As a result, many Canadians are now quite vulnerable to growing borrowing costs. The recent report by the BoC shows that approximately half of variable-rate, fixed-payment mortgages have reached the moment when extra payments needs to be made. It’s almost 13% of all Canadian mortgages.

However, Rogers pointed to the way Canada’s mortgage stress test is making sure “Canadians can keep making mortgage payments even amid higher interest rates.”

She reiterated the Bank of Canada is beginning to see how its aggressive rate hike cycle starts slowing economic growth and restraining prices, although “we still have a long way to go to get inflation back to its target level.”

Right before the speech, traders were betting on a one-third chance of another rate increase by 0.50% on December 7. Today, the key lending rate is 3.75%, which is 3.5% higher than it was in March.