Getting used to higher interest rates

Senior Deputy Governor Carolyn Rogers talks about why interest rates could settle at a higher level than Canadians are used to and why preparing early for that possible outcome is important.

Borrowing costs are higher than what most of us are used to

People buying homes or renewing their mortgages these days are facing the highest borrowing costs they’ve experienced in a long time or—in many cases—ever. That’s because interest rates were unusually low for an extended period, from the 2008–09 global financial crisis until early 2022. It can be tempting to think those very low rates will eventually return. But there are reasons to think that may not happen. For example:

• The major global forces that were pushing down longer-term interest rates may have peaked and could start reversing. These forces include the rise in savings as baby boomers prepared for retirement and the inclusion of China and other high-saving countries in the global economy.
• Ongoing wars in Ukraine and in Israel and Gaza could worsen or spread, which might push up energy prices and translate into higher inflation.

Adjusting to a world where interest rates are higher than we are used to would be a big change for households, businesses and governments. But adapting to this possibility early and gradually can reduce the risk of having to take more abrupt steps later.

The adjustment to higher rates is already underway

We know Canadians are feeling the pressure of higher interest rates and high inflation, and we also know many are already adjusting their borrowing and spending behaviours.

For households, one big change is that the pace of credit growth has slowed since the Bank started raising interest rates. Applications for residential mortgages and spending on goods typically bought on credit, like furniture and appliances, have both dropped significantly.   

While households aren’t adding to their debt levels as much, some are finding it harder to deal with existing debt. Delinquency rates have risen on non-mortgage debt like credit cards and car loans, and some households seem to be relying more on credit cards.

At the same time, delinquency rates on mortgages are still lower than they were before the pandemic.

For businesses, the cost of meeting debt obligations is rising even as the pace of revenue growth is slowing. But most businesses are managing, and insolvencies remain in line with pre-pandemic levels.

More adjustment is coming

One of the key questions we’re asking is whether the pressure felt by Canadian households and businesses could lead to broader financial stress and, ultimately, losses at banks and other lenders.

Most Canadians with mortgages have not yet renewed at higher interest rates. And many tell us, through our surveys, that their current payments are already straining or close to straining their household budgets. Yet most mortgage holders say they can manage higher payments when it comes time to renew.

Canada’s banks are proactively adjusting for a slower economy and, importantly, the banking sector remains strong and resilient.