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The Bank of Canada’s No. 2 official urged preparation for interest rates staying elevated for longer.

Senior deputy governor Carolyn Rogers said households and businesses in Canada should ready themselves for an era of borrowing costs higher than over the past 15 years, given the run-up in interest rates since the middle of 2021.

“It’s not hard to see a world where interest rates are persistently higher than what people have grown used to,” Rogers said in prepared remarks in Vancouver.

Structural forces that were keeping borrowing costs low look to have peaked and may be reversing, Rogers said, adding that higher government debt and geopolitical risks have the potential to push rates around the world even higher.

Rising longer-term borrowing costs are adding to debt service costs for businesses and individuals, Rogers said, leaving “less wiggle room” for the financial system in the event of a shock, like another sharp tightening of financial conditions.

“As a small, open economy, Canada likely wouldn’t be immune if severe global stress were to re-emerge and persist.”

Some Canadians are feeling pressured as they contend with both higher inflation and higher interest rates, she said, and are struggling to deal with existing debt. With 40 per cent of mortgage holders already seeing their shorter-duration mortgages renew at higher interest rates, Rogers said officials are watching how households adjust.

“By the end of 2026, virtually all remaining mortgage holders will go through a renewal cycle and, depending on the path for interest rates, may face significantly higher payments.”

Rogers said banks and financial institutions are keeping bigger capital and liquidity buffers, and are putting more cash aside as a “proactive adjustment” to contend with possible credit losses.

While Rogers made clear her comments weren’t meant to be predictive in terms of the path for the Bank of Canada’s overnight rate, the speech also adds to evidence policymakers increasingly see borrowing costs as less restrictive. The bank held its key rate at five per cent for the second straight meeting in October, citing mounting evidence of a slowing economy despite increased inflation risks.

Speaking to lawmakers last week, governor Tiff Macklem said the neutral rate — the theoretical level of interest rates that is neither restrictive nor stimulative — was probably drifting higher, and he admitted he wasn’t comfortable with the bank’s decision to leave the range for the neutral rate between two per cent and three per cent in their annual review earlier this year.

Source: Financial Post