Canadians have enjoyed low mortgage and interest rates for a longtime. Cheap borrowing costs have prompted Canadian consumers to spend more on automobiles, expensive homes and other goods on credit. This is a worrisome trend, says the Bank of Canada (BoC) and Moody’s.
BoC governor Stephen Poloz said at a news conference Wednesday that Canadians can expect to enjoy low rates for an extended period of time, but warned that any minuscule increase in rates could hurt households from Vancouver to St. John’s. The overnight lending rate remained unchanged at one percent, a figure that’s been the same for five years.
This spells good news for stock investors and potential homebuyers. In a low interest rate environment, borrowers have fuelled booms in housing and stocks with cheap money since 2009, but the BoC warned that it may be time to ease up since we have done plenty of borrowing and consumption.
“Weighing all of these factors, the Bank judges that the risks to its inflation projection are roughly balanced,” Poloz said in a statement. “Meanwhile, the financial stability risks associated with household imbalances are edging higher. Overall, the balance of risks falls within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.”
A falling loonie
On top of these words of warning, the nation’s biggest financial institutions purport that the loonie will likely face even more danger in the coming months. Ostensibly, the loonie has been hurt by the oil boom in the west as the currency has fallen to a five-year low of $1.1385 per United States dollar.
Financial experts say declining oil prices in addition to an oversupply and diminishing demand have provided an immense setback for the Great White North.
For the past few years, a substantial amount of new business investment and job creation have originated from oil-rich Alberta, but the trade surplus turned into a deficit this past summer ($610 million) and economic growth has hindered.
“We’re a commodity currency, so the currency gets crushed,” Michael Craig, a fixed-income hedge fund manager, told the Business News Network (BNN). “It’s a pretty simple play book. You’re going to see an acceleration in the weakness of the Canadian dollar. It’s going to go a lot faster than people think.”
Car loans could hurt banks, consumers
A new report from Moody’s Investor Services suggests the spectacular growth in auto loans could place Canadian consumers and financial institutions at a disadvantage as banks continue to rev up auto loans. The report avers that if the economy experiences a downturn than both parties could get into serious trouble.
The increase in auto loans has outpaced mortgages, credit cards and personal lines of credit since 2007. Moreover, the dollar amounts have gotten larger and the amortization periods have become longer, which are both recipes for even greater debt burdens for an overextended consumer base.
In other words, if the economy faces a crisis and a big jump in unemployment transpires then borrowers will have a difficult time making payments. When a default occurs, the banks are responsible for the loans.
“As long as the Canadian economy is coming along, that’s fine, but if we were to get an employment shock of some sort, we could see a very different outcome with the Canadian banks and with consumers as well,” said Jason Mercer, analyst and assistant vice-president at Moody’s in Toronto, in an interview with the Toronto Star.
Although the nation’s banking system has been lauded for being the best in the world, rising housing prices and higher consumer debt could produce a gigantic shock to the entire economic and financial systems.
