Interest rates must still rise despite high debt, house prices: Bank of Canada

Bank of Canada said Thursday that vulnerabilities from high household debt and elevated housing prices have increased and pose key risks to the Canadian financial system, but warned that interest rates must keep rising to cool the surging cost of living.In its latest financial system review, the central bank said the twin factors have increased the downside risk to economic growth as rising rates meant to counter inflation increase the chance of households having to divert consumption towards debt repayments.“In an environment of tightening financial conditions, high global inflation and increased geopolitical tension, financial system vulnerabilities have become more complex, and risks have become more elevated,” the bank said in its report.

Bank of Canada hikes key interest rate 50 basis points for 2nd time in a row Assessing the vulnerabilities from high household debt has also become more complex over the past two years, as household finances have generally improved even as debt levels increase, it said.Households on average have seen their net worth increase by about $230,000 over the first two years of the pandemic, largely from rising home prices but also from the rising stock market and other gains.The bank said however that an increasing share of households have stretched themselves financially to purchase a home, and that these households in particular may not be able to tap into home equity if housing prices were to experience a correction.The net worth figure also only goes to the end of 2021 and doesn’t factor in the recent pullback in the stock and real estate markets.The bank said that the strong growth in house prices during the pandemic has boosted the economy in the short-term, but in the midterm it.