Rate hike could be 'overkill' for household insolvencies: CIBC's Tal
Even in the face of declining unemployment, insolvency rates among Canadian households climbed in 2019, and the ascent will continue if the Bank of Canada raises interest rates, according to a new report by CIBC.
“This is something that the Bank of Canada has to look at very, very closely because as a society we are much more sensitive to the risk of higher interest rates,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, said in an interview with BNN Bloomberg’s Amanda Lang on Wednesday.
“The impact of interest rates is asymmetrical: lower interest rates cannot lift you, but higher interest rates can kill you even with the unemployment rate in the basement.”
The report, co-authored by Tal and CIBC Capital Markets Chief Economist Avery Shenfeld, comes less than a week after Statistics Canada reported household debt in the third quarter ticked higher, even as incomes rose. Tal and Shenfeld wrote that a Bank of Canada interest rate increase to “anywhere near what was historically neutral … could prove to be overkill.”
The bulk of household debt this year has come from products like secured and unsecured lines of credit with borrowing rates that move in tandem with the central bank’s benchmark interest rate, according to the report.
“It’s the performance of non-mortgage consumer debt that is the canary in the coal mine we need to watch for turning points in the credit cycle,” the report stated.
Over the past five to seven years, there has been a “significant transfer of risk” from credit cards to secured and unsecured lines of credit, since interest rates on the latter are typically lower, Tal said.
“That’s where you see the damage because those vehicles are extremely sensitive to higher interest rates.”
The Bank of Canada has held rates steady at 1.75 per cent since October 2018. In a speech after the central bank’s most-recent rate announcement, Deputy Governor Timothy Lane said policy-makers believe Canada’s economy is “near capacity” and that growth is set to accelerate.
However, bending monetary policy to accommodate this growth may further strain households, the report said.
“Monetary policy will have to look a bit dovish to be only neutral for the economy.”
The report also states, however, that the insolvency rates in today’s economy are “neither climbing as steeply nor as far” as they did during the financial crisis. The report added that most insolvencies today are “proposals” to restructure debt rather than outright bankruptcies, meaning fewer legal costs and loan losses for the country’s lenders due to a higher recovery rate for “proposals.”
CIBC also found that consumer insolvencies jumped the most in Ontario and Alberta on a year-over-year basis, with Quebec and Saskatchewan seeing the lowest increase.
Furthermore, the report found that insolvencies are affecting all age groups. CIBC wrote that while younger Canadians are more likely to experience debt, the share of insolvencies from those over 55 years old has also been on the rise.