MNI POLICY: BOC Says Financial System Resilient So Far

Bank of Canada Deputy Governor Toni Gravelle said Monday the financial system has been resilient to pandemic-related strains but dangers are likely to mount as the drag on incomes and employment persists.

Fiscal and monetary action helped keep many people afloat, and the economy avoided a worst-case scenario through the spring lockdown, Gravelle said.

Those forces helped take some pressure off the balance sheets of commercial banks, he said. Almost all households who deferred loan payments earlier this year have returned to schedule, and the BOC has been able to wind down several market backstops to avoid moral hazard, he said.

"So far, the risk of a wave of consumer defaults seems low," Gravelle said in a speech.

Canada appeared to be in a more precarious position heading into the pandemic after a long housing boom pushed home prices in Vancouver and Toronto to records and fostered a cluster of households with massive debts. Fiscal support has been among the highest among industrial nations this year, boosting household incomes in the second quarter during the lockdown, a pace some experts have told MNI can't last.

"The longer the pandemic constrains jobs and incomes, the greater the risk of financial trouble for highly indebted households, and the greater the risk of defaults that could impair the whole financial system," Gravelle said. "Also, many businesses in sectors where physical distancing is difficult—such as restaurants, bars, hotels and gyms—are struggling to remain solvent as they try to cover fixed payments with less revenue."

The BOC has pledged to hold its benchmark interest rate at 0.25% into 2023. Gravelle said "we expect to keep interest rates low for quite some time," and "to be clear, low interest rates are necessary to support a broad recovery of economic activity."