By Paul Vieira
OTTAWA--Canadian homeowners have the financial capacity to deal with mortgage renewals at higher rates, the Bank of Canada said Thursday, although senior officials pledged to monitor labor-market developments for signs of income stress.
In the central bank's annual financial stability report, officials said most indicators of financial stress have climbed to more normal levels after easing during the pandemic. The bulk of the financial squeeze is concentrated among renters, who are increasingly carrying higher levels of credit-card debt.
The report is intended to offer a broad view of financial-system stability, and identify risks that could morph into bigger stresses and trigger volatility.
"Canada's financial system remains resilient," said Bank of Canada Gov. Tiff Macklem, according to prepared remarks he's scheduled to deliver at a press conference explaining the report's findings. He said households, business, banks and nonfinancial companies have taken steps to adjust to higher interest rates.
The Bank of Canada left its benchmark interest rate unchanged last month, at 5%, although Macklem has said the bank could start cutting next month should inflation exhibit further signs of slowing.
An overriding worry in Canada is about households' ability to handle higher rates on their mortgages. Unlike in the U.S., Canadian lenders generally issue mortgages on terms of five years or shorter. About half of mortgage holders have already renewed at higher rates, and the remainder need to do so over the next two-and-a-half years.
"These borrowers are likely to face relatively larger payment increases," said Carolyn Rogers, the central bank's No. 2 official, also according to prepared remarks. Rogers said there's evidence households should be able to manage the higher debt-servicing costs, citing income gains in recent years, slower spending growth, and higher levels of savings.
Rogers said officials would monitor how the labor market evolves, "since the biggest factor that determines whether someone can service their debt is if they have a stable income."
Fresh Canadian employment data are set for release on Friday. A cooling in job creation and an increase in the unemployment rate to a two-year high has prompted some economists to predict rate cuts beginning next month.
Meanwhile, the Bank of Canada said signs of financial stress have intensified among households who don't have a mortgage, most notably renters. Last fall, rents in Canada climbed at their fastest pace in four decades, with immigration-fueled population growth and a shortage of housing fueling demand. Renters represent roughly one-third of all households.
The central bank's report said rates of arrears on credit cards and auto loans for nonmortgage holders have returned to prepandemic levels and are growing. Central bank researchers indicate that the share of nonmortgage holders who carry a credit-card balance of at least 80% of their credit limit has climbed from under 20% during the pandemic to about a quarter.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
05-09-24 1015ET
