Can Canadian households handle higher interest rates?
Canada entered the pandemic with historically elevated household debt, and a C$193bn surge in mortgage borrowing during the pandemic has raised household debt to a record C$2.5tn. With many central banks turning more hawkish and interest rates set to rise, this begs the question: Can Canadian households handle higher interest rates?
What you will learn:
- Our analysis suggests households are well positioned for the gradual rise in interest rates that we anticipate in the coming years.
- We expect the Bank of Canada will begin gradually raising the policy rate from 0.25% in Q4 2022 to its “neutral” level of 2% by mid-2026.
- However, if the Bank of Canada begins aggressively raising rates in early-2022 and reaches 2% in mid-2023, interest payments as a share of disposable income would surpass the 2018-2019 peak in Q4 2022 and match its pre Global Financial Crisis (GFC) peak of 10% by Q4 2026.
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