The central bank assures it is closely monitoring consumer, corporate, and sovereign debt
Debt levels are in the Bank of Canada’s crosshairs due to the risk these loads could pose amid increasing interest rates, said Carolyn Rogers, senior deputy governor at the central bank.
“The two (financial stability risks) that come to mind and the two that I think are still on our minds at the federal level would be leverage and liquidity, so high levels of debt,” Rogers said during a Toronto panel discussion earlier this week.
“This is at the consumer level, corporate level and at the sovereign level, and that is also at the domestic and international level.”
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This is especially critical at the household level, where the balancing act between daily spending and debt servicing has become precarious over the past few months.
“What has changed of course is the risk,” Rogers said. “What we are seeing now is an increase in interest rates. High levels of debt are easier to sustain at low levels of interest rates. As interest rates go up to combat inflation, certainly those levels of debt can manifest into financial instability.”
The BoC is scheduled to make its next policy rate announcement on Oct. 26, but Rogers offered assurances that the central bank would keep a “high level of vigilance” on their potential impacts.
“The metaphor that I’ve always liked is a forest can have a lot of dry underbrush to it, that’s sort of your vulnerability,” Rogers said. “But it needs that spark to really make that into something more dangerous: fire.”
