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Household differences and monetary policy

Deputy Governor Sharon Kozicki talks about how differences in debt, income and savings across households shaped their experience through the COVID-19 pandemic and how this is affecting monetary policy now.

Watch Deputy Governor Kozicki speak at the University of Regina. Read the full speech.

Households experienced the pandemic differently

Every household has its own financial circumstances. And differences in debt, income and savings across households have affected their experience since the beginning of the COVID-19 pandemic.

When the pandemic struck, lockdowns forced many businesses to close or limit their operations. Many workers were laid off. To ease the burden on households and the economy:

  • governments launched support programs
  • the Bank of Canada cut interest rates

At the same time, many people kept their jobs but worked from home, boosting demand for goods such as home office or exercise equipment. Despite this demand for goods, a lot of these households saved extra money during the pandemic, partly because people couldn’t travel or eat in restaurants.

Housing demand also surged due to:

  • higher savings
  • low interest rates
  • a desire for more living space

Homeowners saw their equity and wealth soar as house prices rose. But some households took on high levels of mortgage debt to buy homes.

Wealth and debt affect cash flow and monetary policy

Interest rates are higher now because we started raising them in 2022 to fight high inflation.

And as we work to rebalance supply and demand and bring inflation back to our 2% target, the impact of higher interest rates is being shaped by the different ways households experienced the pandemic.

In the past, the main way higher interest rates slowed excessive demand was by encouraging people to save and make purchases later.

But many households have high wealth and savings, so they are less sensitive to rising interest rates because they don’t need to borrow money as often to make purchases. And those households that are carrying a lot of debt are more sensitive to rising interest rates. As their debt-servicing costs go up, they have less capacity to spend on anything else.

Balancing the pandemic paradox of accumulated debt and accumulated wealth has been a defining feature of monetary policy considerations during this cycle of tightening.”

We take differences into account when setting policy

When we make monetary policy decisions, we make them for the whole economy. But we consider household differences when we make our decisions, and we watch closely for how they affect people.

The current tightening cycle is different from others since we started targeting inflation in the 1990s. That’s because inflation rose to a much higher level—peaking at just over 8% in June 2022. It has also exceeded our 1% to 3% control range for longer.

Another big difference is that interest rates had been unusually low for a long time before the pandemic, which led many households to take on more debt.

Because of the differences across households, we analyze a lot of detailed data about borrowing, spending and saving from a wide variety of sources. This helps us make sure we’re not raising interest rates by too much or by too little to bring inflation back to target.

We don’t set our policy based on what is happening to one subset of households or to the price of any one good or service. But we do our best to understand what is going on at a detailed level. This helps us do a better job of forecasting where the economy is likely to be headed and helps us balance risks.”

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