Bank of Canada (BoC) officials on Wednesday, February 25th called for greater fiscal prudence among consumers, as record levels of household debt might unbalance Canadian markets—especially since possible higher borrowing rates in the future can affect borrowers’ ability to pay their mortgages and other loans.
Speaking to the Guelph Chamber of Commerce last week, BoC deputy governor Lawrence Schembri noted that a disproportionate amount of borrowing comes from a relatively small group of young households based in Alberta, Ontario, and British Columbia, all with exceptional debt-to-income ratios.
Approximately 720,000 Canadian households have debts amounting to more than 3.5 times their annual income. Schembri said that the BoC has already taken steps to closely monitor these high-volume defaulters, who collectively account for 20% of all household debt (or $400 billion).
Complicating matters is the immense impact of a possible recession on Canada’s fiscal system, which could lead to an over-four-fold increase of the proportion of late-paying borrowers (from 0.4% at present to 1.8%).
The bank dismissed calls to raise interest rates, however, saying that it is “a very blunt instrument” that could do more harm than good to the economy.
“We believe that there are other instruments or measures, including public policies and private remedial actions, better suited to targeting and reducing these vulnerabilities than monetary policy, which affects the entire economy,” Schembri told BNN News.
The BoC’s key overnight lending rate currently sits at 0.5%, with the possibility of another round of cuts later this year if the economy’s recovery does not accelerate.
Article courtesy of MortgageBrokerNews.ca