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Financial stability in a world of higher interest rates

Why interest rates could stay higher than we’re used to in our financial landscape


Let me start by saying the Bank’s monitoring of the financial system doesn’t lead to a forecast of likely outcomes for the financial system or the economy.

So, I want to be clear that when I talk about interest rates, I’m not making predictions about the path for monetary policy. I’m not here to tell you whether our policy rate has peaked or when it might start going down.


What I will share with you are those factors we see as having an impact on the direction of long-term interest rates, some of the reasons we could see rates stay higher for longer and why it’s important to adjust proactively to that possibility.


The Bank’s policy interest rate is currently at 5%. But from the global financial crisis through the first two years of the COVID-19 pandemic, the policy rate was close to zero much of the time, and it never topped 1.75%. In fact, the trend for a range of interest rates that affect borrowing costs in the financial system was downward for several years too.


My former colleague, Deputy Governor Paul Beaudry, spoke about the reasons for this in a speech last June.2 He described the structural forces at a global level that, for many years, combined to push long-term interest rates lower in Canada and other advanced economies. These forces included aging baby boomers that were saving more, China and other developing nations joining the global economy and fewer attractive investment opportunities for businesses. Paul also explained that some of these forces look to have peaked and could start reversing. This would put upward pressure on interest rates.


The adjustment still to come

That’s the story so far. But more adjustment is coming.

A key area we’re watching is high levels of fixed-payment mortgage debt. In all, around 40% of mortgage holders have seen higher payments since early 2022. By the end of 2026, virtually all remaining mortgage holders will go through a renewal cycle and, depending on the path for interest rates, may face significantly higher payments.


In combination with credit stress indicators, our consumer surveys help us gauge how Canadians are adjusting, or planning to adjust, to higher payments. Many respondents say their mortgage payments are close to or greater than the maximum they could handle without cutting other spending. And most say they think the impact of higher interest rates is no more than half done. Despite greater financial pressure though, most mortgage holders still expect they will be able to manage higher payments when they renew.


We see a similar dynamic in the responses to our business surveys. In our latest Business Outlook Survey, published in October, just under half of the companies we spoke to said they think the impact of higher interest rates is just beginning for them. Another 30% said they think it is half done.8 Even so, most businesses said they’re confident they can manage their debts despite the added pressure.


It’s early though, and the effects of higher interest rates are still working their way through the economy. We’ll need to keep a close eye on both credit stress indicators and survey data to gauge how businesses and households are adjusting.



Lendworth Bank of Canada

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