The Bank of Canada (BoC) isn’t ready to move to a tightening bias just yet, nevertheless, it should be pleased with the news that the household debt burdens appear to be falling, says BMO Capital Markets in a new report.
“If you listen carefully, you might hear muffled cheers from the Bank of Canada,” BMO says, in the wake of the news Thursday that Canadian household debt ratios fell for a second straight quarter. This is the first back-to-back quarterly decline since the first quarter of 2001, it notes.
“With interest rates on the rise, we could see borrowing growth remain subdued, driving the debt-to-income ratio down further,” it notes; although, it adds this “likely also means more subdued consumption and economic growth.”
BMO suggests that this latest data indicates that the “constructive evolution” of household balance sheets that the BoC has been expecting, now appears to be unfolding. “While the figures should please policymakers, modest declines in the debt ratio may not be enough to prompt the BoC to drop its mild tightening bias,” it says. “Indeed, the recent spate of better-than-expected data argue for leaving the bias in place. It comes down to whether the bias is entirely designed to deter debt growth, or whether it is also meant to reflect the economic/inflation outlook.”
The firm says that it doesn’t anticipate that the bias will be dropped just yet, “As Governor Poloz said yesterday, ‘stay tuned’.”
BMO also reports that net worth continued to drive higher, reaching 686% of disposable income, almost record high levels, thanks to rising equity prices and real estate values. “Unfortunately, the TSX is down about 4% so far in Q2, a near-term headwind for net worth,” it says.
And, it observes that, “While the household debt burden appears to be easing, governments continue to pile it on”; with gross general government debt rising to 111.9% of GDP; and net debt reaching 51.6%, which is well above the latest OECD average in the mid-30% range.