Canadians not as confident about debt loads as Bank of Canada.
October 24, 2018: Today, Bank of Canada Governor Stephen Poloz raised the benchmark interest rate a quarter-point to 1.75 per cent. In this announcement, Poloz was clear that this measure was taken to achieve a relatively consistent inflation target of between 2.5% and 3.5%.
As I wrote in my blog post last month about inflation hits those in debt even harder, the Bank of Canada uses the interest rate as a tool to keep inflation rates in balance. Raising borrowing rates slows the pace at which people borrow and spend, retracting the amount of money circulating in the economy and cooling costs for consumer goods. More simply put, the central bank is attempting to move interest rates to a place where the cost of borrowing money is neither encouraging of over-extension nor curbing growth.
As I’ve written previously, the unprecedented number of Canadians carrying high levels of consumer debt – from mortgages to car loans and credit card balances – leaves these individuals desperately vulnerable to rising borrowing rates. In his announcement, Governor Poloz acknowledged this while expressing cautious optimism that earlier “vulnerabilities”, like the elevated levels of household debt were “edging lower” and therefore a modest rate hike could be tolerated.
While he may be feeling more confident, Canadians appear to be less so. In a report released today, one-third of respondents to an Ipsos survey conducted on behalf of MNP said “they’re concerned higher interest rates could push them toward bankruptcy, marking a slight uptick since the previous survey in June”. Forty-five (45) per cent said they’re already feeling the effect of higher rates. Younger Canadians are particularly stressed. Sixty-two (62) per cent of millennials said they were already feeling the pressure of paying their bills, and almost half (46 per cent) are concerned about being pushed toward bankruptcy.
Since last summer, the Bank of Canada has raised its main policy rate four times. In today’s announcement, Governor Poloz said future increases would be determined by, “how the economy is adjusting to higher interest rates, given the elevated level of household debt”. At this point, the very real decision point for policy makers is just how quickly ought we to pursue this perfect balance we seek for our economy – and how many Canadians will find themselves on the wrong side of the finish line?
Co-Founder & President
4 Pillars Debt Consultants