Interest Rates to Remain High in Long Term, Says Bank of Canada’s Carolyn Rogers

Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers hold a press conference at the Bank of Canada in Ottawa on July 12, 2023. The Canadian Press/Sean Kilpatrick

Canadians should get used to living with high interest rates in the long term, says the Bank of Canada’s (BoC) senior deputy governor Carolyn Rogers.

Ms. Rogers made the comments during a speech at a meeting of Advocis, the  Financial Advisors Association of Canada, in Vancouver on Nov. 9.

“It’s not hard to see a world where interest rates could be persistently higher than what we’ve all grown accustomed to,” Ms. Rogers said during her speech.

“It could be very tempting to think that rates will not stay but will return back to those very low rates, but there are reasons to think they may not.”

She said there were many reasons to see interest rates staying high, including high levels of government debt, geopolitical instability, aging baby boomers, and less attractive investment options, all of which could impact the Canadian economy in various ways.

“To make sure that the Canadian financial system remains resilient, proactive adjustments to higher interest rates need to continue,” Ms. Rogers said.

Financial Stressors

One of the signs of stress on Canadians is a decrease in mortgage applications, Ms. Rogers said.

“We’ve seen a big drop in applications for residential mortgages, while bank’s mortgage approval rates have remained roughly unchanged. This suggests that the slowdown is being driven primarily by a drop in demand rather than a tightening of credit standards,” she said.

However, she notes that while the delinquency rate for mortgages is low at this point, that’s not the case for credit debt.

“Delinquency rates on credit cards, car loans, and unsecured lines of credit have either returned to or slightly surpassed pre-pandemic levels,” Ms. Rogers said.

A recent survey found that 66 percent of Canadians were living paycheque-to-paycheque, with 50 percent saying they were financially stressed.

Inflation Pains

In a fireside chat at the event, Ms. Rogers said BoC survey feedback indicates that Canadians are hardest hit by inflation rather than rising mortgage payments.

“Inflation is certainly affecting people who have a mortgage and it’s affecting the 60 percent who don’t have a mortgage.”

She said the goal was to get inflation under control or closer to the 2 percent the BoC aims for. The rate is currently 3.8 percent, according to Statistics Canada.

The BoC has increased the interest rate 10 times over the last 18 months, bringing it to the 5 percent it sits at today.

Bank Governor Tiff Macklem has said that the federal carbon tax is contributing to the increased inflation.

On Oct. 30 during testimony to the House of Commons finance committee, Mr. Macklem said inflation would drop by 16 percent if the government would abandon the carbon tax.

Businesses and Banks

Ms. Rogers said businesses and banks have also been preparing for an economic slowdown.

She said that banks were taking action to weather the storm of an economic slowdown by “keeping larger capital and liquidity buffers than before the pandemic and putting more cash aside to deal with potential credit losses.”

“This of course helps them prepare for the effects of a slowing economy and it’s exactly the sort of proactive adjustment that we'd expect to see,” Ms. Rogers said.

She also noted that business insolvencies were on par with pre-pandemic levels.

“While business insolvencies have risen across most industries, they’re still largely in line with levels seen before the pandemic,” she said.

She said the bank will be watching household debt and mortgage stressors.

“We'll need to keep a very close eye on both credit stress indicators and survey data to gauge how businesses and households are adjusting.”