The Bank of Canada’s governor says that households may need to curb spending as mortgage renewals increase their debt-service ratio.

Canada’s big banks were quick to announce increases to their prime interest rates following Wednesday’s rate decision by the Bank of Canada.

CIBC, TD, RBC, BMO, and Scotiabank all announced increases from 3.45% to 3.70% soon after the BoC’s decision to increase its overnight rate target to 1.5%.

The central bank’s governor Stephen Poloz said the decision to raise rates was taken with inflation in mind. Although it is currently on target, the bank’s Governing Council believes that higher interest rates will be needed to keep it on target.

Poloz said that the economy “seems to be on track” but talked about the current uncertainty and how the bank will not react to every piece of data, even when it does not fit with expectations.

Impact on mortgage borrowing
Noting the continued level of household debt, the governor said “At the same time, the housing market is also dealing with the revised B-20 Guideline for mortgage lending, and the data do not yet permit a sharp distinction between the impact of the guideline and the effects of higher interest rates.”

He said that the bank has taken some comfort in an analysis which suggests a very modest increase in debt-service ratios for those due to renew 5-year mortgages in 2019 and 2020; however he also acknowledged that there may be changes to household spending for some as mortgage costs rise, including those who have become accustomed to higher income levels.

“We also know that the jump in payments will be greatest for those who took out mortgages when interest rates were at their lowest levels, in 2015 and 2016, so the mortgage renewal process is likely to weigh on the economy more in 2020 and 2021,” said Poloz.

Overall though, he said that the economy should be well-placed to cope with the rise in borrowing costs “provided that labour income continues to grow.”

 

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