CIBC Private Wealth
May 15, 2024
Money Financial literacy Economy Commentary News Weekly updateMorning Market Brief
The Bank of Canada (BoC) recently released its 2024 Financial Stability Report. The BoC said the financial system remains robust and Canadians are showing the capability to handle higher interest rates. Still, the higher-interest-rate environment has created risks that must be closely monitored. While it appears the BoC sees Canadians adapting to higher rates, which could keep the central bank focused on inflation, rates have likely peaked and will soon be moving downward.
- The BoC says Canadian mortgage holders are in a relatively strong position. Mortgage holders are experiencing relatively low financial stress despite high borrowing costs. They have adapted to higher interest rates by adjusting their spending habits.
- Mortgage holders have benefited from rising wages and pent-up savings. This has given many of them the cash buffer to absorb and manage high borrowing costs. Many mortgage holders have made pre-payments on their mortgages, just before their time of renewal.
- Conversely, non-mortgage holders are experiencing higher levels of financial stress. Those with high credit card balances and auto loans are struggling, with the ratio of those behind on payments returning to pre-pandemic levels.
- The BoC also noted that high asset valuations could pose a risk to the financial system. Elevated asset prices could result in a relatively large price correction, which will weigh on personal finances and consumer confidence.
Given the BoC sees the financial system as relatively strong, the BoC could keep its focus on bringing inflation down to its 2% target. But rates are expected to come down soon. In a recent podcast, Deputy Chief Economist of CIBC Benjamin Tal said the BoC might begin lowering interest rates as early as June amid modest economic activity and relatively lower inflationary pressures.
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