The Bank of Canada has issued a special report on business and household debt levels.
In the report, the central bank said financial markets are showing signs of concern about the how well companies and individuals can weather the COVID-19 economic crisis.
In the past two months, the Bank of Canada has made a flurry of policy decisions that include slashing the target interest rate and undertaking an unprecedented bond-buying program to ease the flow of credit. The new report suggests the measures have helped alleviate liquidity strains and provided easy access to short-term credit for companies and households.
But the central bank warned that the longer the economic crisis goes on, the cash crunch of businesses seeing sharp revenue declines could develop into a solvency issue. The report also raised concerns about already-high household debt levels — something the central bank has warned of in recent years — are likely to rise and become acute for households whose incomes don’t fully recover from the pandemic.
The number of Canadian households — those putting more than 40% of their income to cover debt payments — “is likely to rise,” the bank said, and fall behind on loan payments even with the deferral of some 700,000 household mortgage payments.
Bank of Canada Governor Stephen Poloz, speaking at a press conference, said the banking system is strong enough to handle the situation, even if becomes severe in the coming months.
“To be clear, the pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake,” he said in his opening remarks.
Aside from what is now approaching $150 billion in direct federal aid, the central bank over the course of March slashed its benchmark interest rate to 0.25% from 1.75%. It has also snapped up federal bonds to effectively provide low-cost financing to Ottawa to cover a massive spike in spending.