The Bank of Canada’s interest rate hike is worrisome for those in debt

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The Bank of Canada has raised its key interest rate by one percentage point, which could be bad news for many indebted Canadians.

The Bank of Canada has raised its key interest rate by one percentage point, which could be bad news for many indebted Canadians.

The rate is now at 2.5% as the central bank tries to control inflation.

But some financial industry experts warn that the aggressive increase could hit some people right away.

“Thus, interest rates have an immediate impact on their mortgages if they are variable rate. This impacts their mortgages upon renewal if they have a closed rate. It has an immediate impact on their credit lines, an immediate impact on flexible personal loans,” explained Laurie Campbell of Bromwich and Smith, a debt relief and consolidation company.

She worries about what will happen in the short term, especially when you look at recent numbers on spending by Canadians.

“I have to tell you honestly, it’s bad. We consider that for every dollar earned by a Canadian, he owes $1.86. To put that into perspective, in 1990 for every dollar a Canadian earned, they owed 90 cents. So we’re more than double that rate today,” Campbell added, noting that many Canadians have been hanging on by a thread — mostly because they’ve tapped into their home equity and are relying on the credit.

“Canadians are hanging by a thread because they are tapping into their home equity — we know this is happening in major urban centres. They also rely on credit. And let’s not forget, during COVID there was a real reprieve from creditors, they weren’t actually collecting outstanding debt. On top of that, the CRA also collects aggressively, especially from people who may have collected CERB and not qualified during this time.

“Making Hard Choices”

The Credit Counseling Society has seen a double-digit increase in the number of people seeking help.

“In terms of average debt for the average Canadian, excluding mortgages, it’s just over 20,700. Here in British Columbia, it’s just over 21,000. And for a lot of those people, that’s means credit card debt,” said Scott Hannah, the company’s chief executive.

“I think for a lot of people they’re going to have to reconsider whether or not they can maintain their home. For people who have large and variable debts, it’s about making difficult choices.

Hannah says society is already hearing from people whose paychecks are “stretched beyond belief” and who are trying to figure out how to pay off their debt.

The Bank of Canada’s 100 basis point rate hike is the largest since August 1998. The central bank has signaled that it expects to raise rates further.

“The Board of Governors continues to believe that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s continued assessment of the economy and inflation,” the bank said in a statement. statement on Wednesday.

Campbell says many Canadians are in a “very perilous situation,” especially in the face of record high inflation.

“Really, nothing the feds have done so far has curbed inflation,” she told CityNews.

Campbell says Bromwich and Smith have not “yet seen a marked increase in insolvencies”. But that could soon change.

“I suspect we’re going to see a significant increase in insolvencies in the fall as these interest rates and inflation on top of that start to impact individuals over a period of time,” Campbell explained. .

This increase comes after a difficult few years for many people across the country. Campbell notes that the pandemic has resulted in significant job losses, with some people left “unemployed or underemployed.”

Inflation has only added to the strains people face.

“Add this increase in interest rates, we are going to see a lot of Canadians feeling a lot of anxiety. And the sad reality, and it’s very, very sad, is that people don’t talk about money, they don’t talk about debt. So they feel like they have nowhere to go, they feel like they’re alone in their crisis, and the reality is that many, many Canadians are in the same boat,” Campbell said. , urging Canadians to try to get their debt under control sooner. only later.

Hannah adds that while this may be a serious situation for many, it doesn’t have to be “catastrophic”.

“If they haven’t already, I encourage everyone to take a hard look at their budget to see where they can get cuts with minimal impact on their lifestyle,” he said.

“It’s important that if people, if they don’t know where to turn, get help from a trusted source.”

Recession worries

Earlier this month, a senior economist at the Canadian Center for Policy Alternatives published an analysis warning that raising interest rates too quickly by the Bank of Canada could push the economy into a recession, with many people ending up as collateral damage in the bank’s quest to fight inflation.

“The promise of the Bank of Canada’s rapid interest rate increases is that we can get a soft landing, meaning we can bring inflation down but do it in a way that doesn’t cause recession. So my question was, has this ever happened before? What is our success rate in getting that kind of soft landing when we have to reduce the rate of inflation from where we are – 7.7% – down to the bank’s target, which is 2% ? David Macdonald told CityNews on July 7.

The answers to these questions, however, were “a little disappointing”, he said.

“We have a zero percent success rate in getting there. We’ve had three instances where we’ve seen this level of decline, the problem is each of them has been accompanied by a recession,” Macdonald explained, noting that those three times were between 1974-76, 1981-83 and 1991-92.

On average over these three periods, the economy would have lost about 850,000 people from the current population, he added.

With files from Patricia D’Cunha, Mike Eppel, Kurtis Doering and Kareem Gouda.

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