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Interest rates may stay higher for good: Bank of Canada's Carolyn Rogers

In a cautionary message to Canadians, Carolyn Rogers, the senior deputy governor of the Bank of Canada, has urged households and businesses to brace themselves for the likelihood of interest rates remaining elevated for an extended period. Speaking in Vancouver, Rogers emphasized the need for preparation as structural forces that have kept borrowing costs low appear to have peaked, potentially ushering in a new era of higher interest rates.

"It's not hard to see a world where interest rates are persistently higher than what people have grown used to," warned Rogers, highlighting the significant rise in interest rates since mid-2021. This shift, according to Rogers, is driven by factors such as higher government debt and geopolitical risks, which have the potential to push global rates even higher.

Rogers underscored the impact of rising longer-term borrowing costs on businesses and individuals, stating that it reduces the financial system's "wiggle room" in the face of unforeseen shocks, such as a sudden tightening of financial conditions. As a small, open economy, Canada may not be immune to global stress, and Rogers urged vigilance in preparation for severe global economic challenges.

The senior deputy governor acknowledged the strain some Canadians are currently experiencing due to both higher inflation and interest rates. With 40 percent of mortgage holders already facing renewed mortgages at higher interest rates, officials are closely monitoring how households are adapting to these changes. Rogers pointed out that by the end of 2026, nearly all remaining mortgage holders will undergo renewal cycles, potentially facing significantly higher payments depending on the trajectory of interest rates.

Recognizing the challenges ahead, Rogers revealed that banks and financial institutions are taking proactive measures to contend with potential credit losses. This includes maintaining larger capital and liquidity buffers while setting aside more cash.

Although Rogers emphasized that her comments were not intended as predictions for the Bank of Canada's overnight rate, her remarks align with a broader trend among policymakers viewing borrowing costs as less restrictive. The Bank of Canada opted to keep its key rate at five percent for the second consecutive meeting in October, citing signs of a slowing economy despite heightened inflation risks.

Governor Tiff Macklem, speaking to lawmakers recently, indicated a shift in the neutral rate, suggesting that the theoretical level of interest rates neither restrictive nor stimulative is likely drifting higher. He expressed discomfort with the decision to maintain the neutral rate range between two percent and three percent during the annual review earlier this year.

As Canadians navigate an economic landscape marked by inflation and higher interest rates, the Bank of Canada's cautionary message underscores the importance of preparedness and resilience in the face of evolving financial conditions.

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