Debt growth made the Bank of Canada pause its rate-increase cycle

Bank of Canada Governor Tiff Macklem admitted that interest rate increases have affected the country’s homeowners significantly, noting that the influence of higher borrowing costs on consumers is the main reason he decided to stop the rate-increasing cycle sooner than the U.S. Federal Reserve.

According to Macklem, the BoC needs time to assess how households and businesses are adjusting to higher rates before it starts acting again.

Today, Canadians “are more indebted than they’ve ever been,” he said in a speech on Tuesday. While certain households accumulated cash during the pandemic, “additional savings will probably not last as long as the higher debt.”

Such statements underline the uncertainty policymakers are dealing with as the economy with its expensive real estate market is challenged by the highest interest rates in 15 years.

Macklem was the first central banker among Group of Seven to start raising rates that drastically in 2022, and now he’s the first one to put a stop to it.

Those rate increases, which have pushed the Bank’s key lending rate up from 0.25% to 4.5%, have reduced home sales and caused home prices declines in certain markets. Canada’s benchmark price went down by 13% from its previous peak, and homebuyers have decided to wait for the mortgage rates situation to become more predictable.

“We’ve faced an extremely drastic slowdown in housing. However, with the pace and extent of interest rates increase, it’s mostly in line with our expectations,” – Macklem added.

In his opinion, the real estate market will soften before it stabilizes later in 2023.