Deputy Governor Sharon Kozicki talks about why differences in income, wealth and debt across households are important for the economy and what the Bank of Canada will be watching for as interest rates rise.
How household differences can amplify shocks
When a shock like the COVID-19 pandemic hits the economy, it affects some households more than others. The impact on different households often depends on characteristics such as age, gender and income level. Those differences can also amplify the impact of fiscal and monetary policy responses to the shock.
Our ability to track how different groups of households respond to economic developments has helped guide our monetary policy response to the pandemic. And it has been vital to our ability to monitor household vulnerabilities and risks to the financial system.
Like other central banks, the Bank of Canada sets monetary policy for the whole economy. But that doesn’t mean our policy affects everyone in the economy the same way. And it doesn’t mean our policy has the same impact on the economy overall, regardless of the characteristics and circumstances of the people in it.”
The pandemic’s uneven impact on households
Most people who could work from home during the pandemic kept their jobs and saw little or no interruption to their income. Meanwhile, public health measures to contain the virus severely affected some services—like restaurants, accommodation, travel and entertainment. Many people in these sectors lost income. The impact was most severe for low-wage workers, especially women and young people.
The effects of the pandemic on employment have been larger and more unequal than those of past recessions. Still, many households across income groups are emerging from the crisis with improved financial health. This is due to the extraordinary supports that were available during the pandemic as well as limited opportunities to spend during lockdowns. The strong recovery of the labour market overall has also been an important factor.
Despite these positive developments, however, important risks remain. These include relatively high household debt levels and high inflation.
In fact, because inflation is high and the economy is running at full capacity again, in early March we raised our policy rate and said we expect it will need to rise further. Throughout that process, we’ll be watching developments related to household finances closely, thanks to the data and tools that have been useful during the pandemic.
Returning inflation to the 2% target is our primary focus and unwavering commitment. We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully.”
Better data lead to better decisions
We’re not just going to assume that households are well positioned for future rate hikes. We’ve invested in rich data capabilities to better understand household differences. These insights will inform our thinking. And that will enhance our ability to act with confidence—managing risks as we go.