MNI:BOC Says Financial System Has Been Resilient To Rate Hikes
Canadian households and financial institutions have been resilient to the jump in interest rates and lenders ranked the risk of a cyber attack well ahead of imbalances in one of the world's most stretched housing markets, according to the BOC's Financial Stability Report released Thursday.
"Households, businesses, banks and other financial institutions have taken proactive steps to adjust to higher interest rates and to weather economic shocks," Governor Tiff Macklem said in the text of a statement opening his press conference in Ottawa. "This adjustment still has some way to go and continues to present risks to financial stability." The Bank hiked rates from near zero during the pandemic to the highest since 2001 at 5% and Macklem didn't provide any update on his recent comment that a cut at the June meeting is within the realm of possibility.
The strain of higher borrowing costs and inflation is being felt the most by renters rather than mortgage holders the Bank found, while lenders continue to have good capital buffers against shocks. The large group of mortgage holders due to refinance at much higher rates in the next few years will get some help from rising incomes, the Bank said.
Economic risks that could strain markets have diminished as investors see less chance of a domestic recession and corporate bond spreads narrowed, the Bank said. The financial system's overall resilience is seen at the highest in the survey that began in 2018. Investors surveyed by the Bank ranked a cyber-attack as the biggest threat, followed by geopolitics and market liquidity.
"Inflation in most economies has come down, and inflation targets are in sight. However, there could be volatility in markets as expectations shift about when and by how much central banks will lower their policy rates," Macklem said.
The Bank's investor survey said there's a risk of a higher-than-expected rates scenario that could trigger flight-to-safety trades. Some investors predict more policy intervention if there's another large shock, though others said the scope to respond may be limited by large central bank balance sheets and fiscal deficits.
The BOC isn't a direct bank regulator but oversees several major payment systems. The bank regulator OSFI has increased capital buffers citing housing risks and a mortgage stress test has also been introduced as consumer debt grew bigger than the country's GDP. The BOC report Thursday noted some policy moves that have mitigated financial distress such as pandemic payouts. The Bank also said the share of new mortgages for households with a loan-to-income ratio above 450% fell to a historical low of 12%.