The likely deceleration of the housing market would be a welcome effect, Macklem says
Contrary to the fears of many observers, the upward trend in interest rates will not hamper the national economy and might instead lead to a much-needed cooling of the housing market, according to Bank of Canada Governor Tiff Macklem.
“The economy can handle – indeed needs – higher interest rates,” Macklem said late last week.
The combination of eroding affordability and mounting debt has led to an extremely volatile situation that requires vigilance on the central bank’s part, Macklem said.
“If the economy slowed sharply and unemployment rose considerably, the combination of more highly indebted Canadians and high house prices could amplify the downturn,” Macklem said.
Read more: Are Bank of Canada rate hikes risking a housing crash?
Canadians who are already paying back large amounts of debt are at particular risk.
“If those in highly indebted households lose their jobs, they would likely need to reduce their spending sharply to continue servicing their mortgage. In addition, a big correction in house prices would reduce both household wealth and access to credit, particularly among the most-indebted households,” Macklem warned.
Should this become sufficiently widespread, the impact on the national economy and financial system could be incalculable.
However, “this is not what we expect to happen. Our goal is for a soft economic landing with inflation coming back to the 2% mark. But it is a vulnerability to watch closely and manage carefully,” Macklem said.
The BoC’s overnight rate is currently at 1.5% following outsized hikes that raised it from 0.25% at the beginning of 2022. The rate is anticipated to push borrowing costs to 3% by October, according to the consensus of experts recently polled by Bloomberg.