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Bank of Canada says households can cope with higher rates

The Bank of Canada recently reassured Canadians that they can handle higher borrowing costs, while also highlighting some risks associated with rising asset values and debt among renters.

According to the central bank's annual review published Thursday, Canadians are actively adapting to increased interest rates, and the overall financial system remains sturdy. Despite mortgage payments climbing for about half of the country, households are benefiting from higher incomes and savings, enabling them to adjust their spending habits accordingly.

Senior Deputy Governor Carolyn Rogers emphasized that households seem flexible enough to manage their debt even with higher interest rates, indicating a level of resilience.

During the pandemic, many households and businesses managed to accumulate liquid assets. Additionally, a growing number of mortgage holders with flexible rate mortgages are making extra payments ahead of schedule.

However, the bank pointed out challenges for non-mortgage borrowers, particularly those with credit card and auto loan debts. The proportion of individuals behind on payments in these categories has returned to pre-pandemic levels, raising concerns.

Policymakers are closely monitoring inflation and considering when to adjust borrowing costs. The current lack of widespread financial stress allows them to focus more on inflation concerns rather than immediate rate cuts.

Yet, the bank is mindful of stretched asset valuations, especially in equities and corporate bonds in both the U.S. and Canada. These valuations might not accurately reflect economic risks and could lead to significant price adjustments.

The rise in business insolvencies, partly due to the end of pandemic-era financial support, is also on the bank's radar. While higher rates and decreased demand contribute, they note it's mainly a "catch-up effect."

Canadians, already among the most indebted in advanced countries, are facing challenges with housing affordability. The bank highlighted that over a third of new mortgages have high debt-service ratios, exacerbating the situation.

Looking ahead, Governor Tiff Macklem and officials will convene in June to set rates. While there's speculation about a rate cut, the decision will depend on various factors, including upcoming inflation data slated for release later this month.



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