MNI: BOC-Prepare For Strain Of Persistent Elevated World Rates

Bank of Canada Senior Deputy Governor Carolyn Rogers said Thursday commercial lenders and households should prepare themselves because interest rates are likely to remain elevated as forces that pushed borrowing costs down through the 2008 global financial crisis unwind, and there's no guarantee the domestic financial system can remain unscathed if there's another financial meltdown.

"Canada likely wouldn’t be immune if severe global stress were to re-emerge and persist," she said, noting recent troubles in the UK gilt market and failures among U.S. and Swiss banks. "Such severe stress could interact with existing vulnerabilities, like high household debt."

"To make sure the Canadian financial system remains resilient to future stress, proactive adjustments to higher interest rates need to continue," Rogers said in the text of a speech she's giving in Vancouver. She didn't give an outlook on the current policy rate, saying only the Bank is committed to bringing inflation all the way back to the 2% target. 

While Canada's major banks came through 2008 with little damage, what followed was a mortgage lending boom creating one of the world's most stretched housing markets according to the IMF and research by several commercial banks. Lenders have recently been given regulatory latitude to restructure mortgages for borrowers whose floating-rate loan payments leave them unable to pay down any principal or even all of the interest due. 

Commercial banks are taking welcome proactive steps to make them more resilient such as keeping larger capital and liquidity buffers and putting more cash aside to deal with potential credit losses, Rogers said. There will be continued adjustment from households and lenders to higher interest rates, she said. The Bank of Canada hiked 10 times to 5% from near zero during the pandemic, with borrowing costs now the highest since 2001. Governor Tiff Macklem has been criticized for a conditional commitment during the economic slump that interest rates would remain low for a long time. 

Rogers said her speech isn't aimed at making any predictions around where the Bank's policy rate is headed, at a time when provincial premiers including in British Columbia where she's speaking have called for an end to rate hikes. Vancouver has long been considered one of the most vulnerable housing markets in Canada with the average detached home price long ago surpassing the million-dollar threshold. Nationwide, consumer debt is now bigger than the country's GDP. 

Part of her speech appeared aimed at younger Canadians who have never seen anything other than some of the lowest borrowing costs in decades. 

"If you had a mortgage in the 1970s or early ’80s, today’s rates may not seem very high. On the other hand, young people buying homes today are facing some of the highest borrowing costs they’ve ever seen," she said. "It may be tempting to believe the low rates that we all got used to will eventually come back. But there are reasons to think they may not."

Global forces that pushed down borrowing costs don't seem likely to continue, Rogers said. Those include high global savings linked to the Baby Boomers and China's economic liberalization, and in the near term potential inflationary pressure from global conflicts, she said. "It’s not hard to see a world where interest rates are persistently higher than what people have grown used to."