MNI: BOC Says Rate Hikes And Housing Are Adding To Market Risk

The Bank of Canada said Thursday that financial market risk has climbed over the last year as central banks raise interest rates and domestic consumers pile on even more mortgage debt.

Global rate hikes will add to pressures on markets grappling with high inflation and Russia's invasion of Ukraine, according to the Bank's Financial System Review. Markets are vulnerable to another dash for cash, a sudden repricing of energy assets amid emerging climate change rules and cyber attacks increasingly organized by state-sponsored hackers, the report said. 

"The tightening of monetary policy globally will test the resilience of the financial system and could worsen existing financial vulnerabilities," the Bank said. "Central banks face a delicate balancing act. They must reduce inflation while seeking to safeguard both the recovery from the pandemic and overall financial stability." Governor Tiff Macklem will hold a press conference to elaborate at 11am EST.

Growing numbers of households carrying big mortgages are getting "particular attention" from policymakers. Property values jumped 50% through the pandemic, investors bought up a greater share of houses and there is more evidence people were buying on fear that prices would only keep going up, the Bank's report said.

"A rising number of households have financially stretched to purchase a house amid elevated house prices," the Bank said. Households who took out a mortgage in the last two years could see monthly payments jump 30% as they renew with higher interest rates, the report found. 

Canadian banks have proven to be resilient through Covid. Stress testing suggests they have enough capital to withstand a six-quarter recession that reduces GDP by 5.8%, the BOC said.

Growth of crypto assets is a growing risk amid runs in stablecoins, their volatility as a form of payment, a lack of established consumer protections and investors who "under-appreciate the risks," the Bank said. Still, at just 1% of global assets at their peak in November, they aren't a systemic risk at this time.