MNI POLICY: BOC Sees Financial System Risks Amid Low Rates

Bank of Canada Governor Tiff Macklem said Thursday the pledge to hold interest rates near-zero for a long time to help the economy through Covid-19 may boost risks to the financial system linked to indebted consumers and companies.

"We will watch the evolution of financial vulnerabilities closely, particularly given our commitment to keep interest rates low," Macklem said.

"We came into the pandemic with a number of vulnerabilities. A significant proportion of households were carrying high levels of debt. Some businesses were also more indebted, especially in commodity-related sectors," he added.

Households face a challenge in coming months with 800,000 mortgage borrowers reaching the end of a six-month deferral program and more delaying payments on other loans, Macklem said. Businesses also face insolvency pressure as they struggle to pay bills, a problem that may worsen if the recovery is delayed, and there are signs Canada is entering a second wave of the virus, he noted.

DEFERRALS

"The six-month payment deferral period is ending for most borrowers, and the next few months will be crucial. To this point, the resumption of payments has been going quite well," he said.

The housing market has shown strength lately, and policymakers have macro-prudential tools that can be used again if that turns into something more like the speculative conditions seen back in 2016, Macklem said.

Climate change is "a longer-term risk that is accelerating," both from physical damage caused by more severe weather and repricing of assets in the shift to a lower-carbon economy, he said. "If not appropriately priced and managed, both types of risk have the potential to bring about significant losses for financial institutions and could even threaten the stability of our financial system," the Governor said.

He reiterated that he expects the economic recovery will need time to build, saying "it will be a long, slow climb to get everybody back working at pre-pandemic hours, particularly in the sectors most affected."