Inflation in Canada

As Canadians continue into a post-pandemic world, economists predict that inflation will increase into late 2023, resulting in much higher interest rates the likes of which have not been seen for many years. This will have a dramatic and far-reaching effect on all Canadians, and those who have accumulated significant levels of debt in the past decade are likely to suffer the most severe and least desirable consequences. One potential consequence is that Canadians, who took advantage of historically low interest rates in recent years, could face serious bankruptcy if higher rates make their current debt levels unsustainable.

Debt levels among Canadians have been high for some time. According to Statistics Canada, in the third quarter of 2020, debt-to-income ratios (DTIs) stood at 166.9, the financial measure of household-level indebtedness in Canada. This figure is up from a post-recession low of 143.4 in the second quarter of 2013. A significant driving force behind this increase, according to economists, is the numerous record-low interest rates which were implemented to ensure the Canadian economy did not suffer overly severe impacts from the pandemic. These ultra-low rates made borrowing to finance purchases of property, goods, and services more compelling than paying cash, and Canadians responded by taking on more and more debt.

At this time, Canadian interest rates are only slightly above half of what they were in 2008. To accommodate for this, the Bank of Canada has begun tapering its bond-buying scheme and has plans to raise interest rates by as much as two percentage points by the end of 2023. Although two percentage points may not seem like much at face value, it could have very dangerous and severe effects for anyone overburdened with debt. In fact, estimates that a two per cent interest rate increase on an average $500 monthly payment could add an additional $62.50 in interest charges over the life of the loan.

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For those who have already amassed an unmanageable amount of debt, the effects of rising interest rates hitting their pocketbooks could be outright catastrophic. These individuals might discover at that their current debt loads may be much too burdensome to bear given much higher interest burden. If they are unable to control it they may have no choice but to declare bankruptcy and face the consequences to their financial health.

The additional unfortunate reality of higher interest rates is that it will become more expensive and difficult to acquire more debt during a time when the Canadian economy is in the midst of substantial recovery. Perpetually low-interest rates have a positive effect on borrowing power, but high-interest rates can cripple those once resilient Canadians now facing high debts. For younger Canadians, some estimates put non-mortgage debt levels at over $17,000 for the average post-secondary student. With lower employment prospects due to the pandemic, rising interest levels could remain an ever-present obstacle for youth.

Notwithstanding the scale and work spans of Canadians struggling with debt, Canada’s current economic situation is expected to improve providing some cushion when it comes to the potential shock waves of increasing interest rates. Economists have forecast Canada’s growth rate to reach an incredible 5.8% by the end of 2021. This could provide a buffer to the effects of rising interest rates as consumption, savings, and returns become more accessible to those who have secured some stability in their finances.

The looming effect of higher rates in 2023 still remains a tad unclear but it could have the potential to throw a wrench into the spokes of those Canadians who took advantage of the historically low rates and racked up alarming debt loads. Whether they default or find a way to implement precautions and long-term debt reduction plans now could be the crucial difference between bankrupting thousands of indebted Canadians and helping them become debt free.