Senior Deputy Governor, has warned that interest rates may remain high for longer than was previously expected, potentially becoming a permanent feature.
She added that we might need to brace ourselves for a new era of high-interest rates and even that we might never see pre-pandemic interest levels again. Rogers clarifies that her remarks on a permanently high cost of borrowing are nothing more than speculation, but adds that it’s “not hard” to see such a world that doesn’t recover to pre-pandemic interest levels.
She added that this could bring in a new era of high-cost borrowing and that individuals and businesses should brace themselves and adjust so they can better absorb the impact.
Rogers went on to add that many Canadians are already feeling the pressure as high-interest levels made their mortgage repayments higher. This in itself could be disastrous for many households, while Canadian businesses and households are also under intense pressure from the ongoing cost of living crisis, with many having no bandwidth to absorb any more bad news.
Those most affected by the recent economic climate are those on low incomes. Rogers also claims that nearly all mortgage owners will need to renew their mortgages at higher rates as they struggle to make monthly payments.
About 40 per cent of mortgage holders have already renewed shorter-duration mortgages with longer repayment terms to help spread the loan into affordable repayments. She also added that officials are watching keenly to see how households cope and adjust in case they need to intervene.
For now, it appears as though lenders and borrowers are adjusting so that higher lending costs are less prohibitive. For example, many businesses are keeping greater cash reserves to help them deal with any future rises. However, the rise in recent borrowing costs has so far been limited by other forces that might be reversing, according to Rogers. If that happens then not only will they no longer help limit future rises, but they’ll contribute to them instead.
For example, more borrowers moving onto longer-term mortgages are using a buffer that helps protect them from rate rises. Once they have made the switch to a longer term, the buffer no longer exists for them, leaving them more vulnerable to future market shocks.
Rogers went on to add that an economy like Canada’s would likely be impacted by market pressures elsewhere in the world and that the current tense geopolitical tensions and higher government debt could result in rates increasing again.
For now at least, mortgage delinquency rates are at a “historically low” figure of only 0.15 per cent, but we can see this number surging in 2024.
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