Bank of Canada. Image credit: Wikimedia Commons
Ottawa/CMEDIA: Bank of Canada has reported high household debt and elevated housing prices have posed increased risks to the Canadian financial system,
These rising rates are meant to counter inflation and increase the chance of households having to divert consumption towards debt repayments, the central bank said Thursday in its latest financial system review.
“In an environment of tightening financial conditions, high global inflation, and increased geopolitical tension, financial system vulnerabilities have become more complex, and risks have become more elevated,” the bank said in its report.
The net worth of households on average has increased by about $230,000 over the first two years of the pandemic, due to higher home prices as well as from the rising stock market and other gains.
The net worth figure reflects the end of 2021 and doesn’t factor in the recent pullback in the stock and real estate markets.
The strong growth in house prices during the pandemic has boosted the economy in the short term, but in the midterm, it could weigh on economic growth, said the bank.
The bank added that looking ahead to the first quarter of 2024, the probability of the trends of negative growth have increased to 15 percent, up by five percentage points compared to what it would have been if debt levels had not changed during the pandemic.
Added to this negative growth increase is central banks’ raising interest rates to counter decades-high inflation rates.
House prices were up 24 percent in April compared with a year earlier, and up 53 percent relative to April 2020 have led to the potential rising costs.
Other vulnerabilities to the financial system, said the bank include cyber threats given the interconnected nature of the financial system, and the fragile liquidity in fixed-income markets.
Inflation has intensified, in part due to Russia’s invasion of Ukraine, with Statistics Canada saying inflation hit 6.8 percent in April driven up largely by higher food and shelter prices.
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