credit and debt
03. credit & debt New debt is shrinking in Canada, which is exactly what the Bank of Canada is aiming for with higher interest rates.
FOLLOWING THE BANKER’S ORDERS
As we noted earlier, the Bank of Canada’s response to fighting inflation has been to raise its policy rate and engage in quantitative tightening, which has the effect of increasing interest rates. The goal is to disincentivize borrowing (and spending) and incentivize saving, essentially reversing the goal from its earlier period of low interest rates and quantitative easing that sought to stimulate economic activity. And when it comes to taking on new debt, Canadians have adjusted their behaviour recently. After taking on increasingly larger volumes of debt from Q3 2020 though Q1 2022, that trend has reversed course, with credit extended in the most recent quarter totalling just $19 billion, 60% less than the same period in 2021. For the full year in 2022, Canadians added $138 billion debt, which was 26% less than the $186 billion added in 2021.
Mortgage debt typically makes up the largest share of household credit, and in the most recent quarter that was once again the case, with 80% of new credit extended being in the form of mortgages. New mortgage debt, however, was 65% less in the last quarter than in the same quarter last year, as higher interest rates were likely contributing to the amount of borrowing Canadians were taking part in. Consumer credit, on the other hand, has been increasing of late. Canadians added nearly $3 billion in the last quarter, 37% more than the previous year. Since consumer credit often carries significantly higher interest rates, this will be something to monitor. Overall, Canadians will not be impacted uniformly by high interest rates. Those with fixed-rate mortgages (as discussed earlier) might be in a better position than they first appear, while in the following sections we’ll explore some of the risks associated with variable mortgage rates.
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