The Bank of Canada has been navigating a complex economic landscape since the onset of the COVID-19 pandemic, marked by a rapid cycle of interest rate cuts and subsequent tightening to combat inflation. These measures have had varied impacts on different households, a phenomenon underscored during a speech by Bank of Canada deputy governor Sharon Kozicki at the University of Regina on Monday.
Kozicki highlighted that no household is truly average, as each experienced the economic events of the past few years differently. The pandemic saw many middle- and upper-income households accumulate significant savings, while others faced mounting debt. This disparity was further complicated by a real estate boom fueled by increased savings and low-interest rates, which led to some households taking on high levels of mortgage debt while others saw their home equity increase.
The deputy governor emphasized that the current elevated debt levels have altered how higher interest rates affect individual households and changed the relative importance of monetary policy transmission channels. Kozicki pointed out that the cash-flow channel has become more important than in past cycles due to Canadians entering the pandemic with already high levels of debt. Higher interest rates have increased the carrying costs of existing debt, leaving people with less disposable income.
Despite inflation dropping from very high levels last year, Kozicki stated it remains too high, necessitating a sharp rise in interest rates. She also noted that the costs of inflation are not equally distributed or proportionate to income.
Addressing the Bank's current challenges, Kozicki said it is grappling with a balancing act due to the disproportionate effects of this tightening cycle. Households with elevated savings and pent-up demand are less sensitive to rising interest rates, while those with significant debt are more sensitive. Policymakers at the central bank are aware that higher rates have been "very painful for some," but also recognize that persistently high inflation weighs on households of all income levels. Despite these challenges, Kozicki affirmed that "we are seeing signs that monetary policy is working."
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