Mounting debt costs are spurring stress for Canadian households heading into the Bank of Canada’s interest rate decision next week, according to the MNP Consumer Debt Index.
The insolvency firm’s quarterly survey tracks how Canadians are feeling about their ability to pay down debt, and the latest instalment released Wednesday shows a mixed picture of worry about handling future rate hikes and some improvements in the ability to cope with higher interest costs.
Some 28 per cent of respondents indicated their ability to deal with an additional percentage point of rate hikes had worsened from the previous quarter. Phrased another way, some 37 per cent of respondents said they couldn’t absorb another $130 in interest payments on their debt, compared with 32 per cent in the previous survey.
MNP’s Consumer Debt Index is based on Ipsos polling of more than 2,000 Canadians between Sept. 5-8, 2023.
More than half of respondents to the poll said they’re $200 or less away from not being able to meet all of their financial obligations, according to MNP.
Canadians now have an average of $674 left over at the end of the month, the survey said, almost $100 less than in the previous quarter.
The latest MNP debt survey comes after the Bank of Canada increased its benchmark interest rate 4.75 percentage points since March 2022, significantly raising the cost of borrowing on products including credit card debt, certain loans and mortgages.
But despite the rapid tightening cycle, the survey also indicated most Canadians are having an easier time handling their debt obligations.
MNP’s Consumer Debt Index improved slightly to 86 points, up three points from the last quarter but still below the five-year average.
Canadians are feeling “marginally” better about being able to pay down debt, MNP said, with 60 per cent saying they’re in financial trouble, down three percentage points from last quarter. The number of people who have regrets about their debt levels declined to 45 per cent, down seven percentage points quarter-to-quarter.
In a statement accompanying the release, MNP president Grant Bazian pointed to strength in the labour market — which has seen Canadians’ average hourly wages rise upwards of five per cent annually in recent months — as helping to improve the debt outlook for households in the face of higher interest rates.
But he warned that recent signs of cooling in the economy could soon spell the end of this financial tailwind for households.
“For now, the financial concerns of some Canadians have been offset, at least to some degree, by the strong job market. The uncomfortable truth is that higher interest rates slowing the economy will inevitably come with consequences like increased unemployment,” he said.
A number of companies have announced layoffs in recent days including LinkedIn and Scotiabank.
Canadians stressed about the possibility of future interest rate hikes could have reason for relief if current forecasts for the policy rate hold.
The signs of a slowdown in the economy, alongside weaker inflation data and a dour outlook among businesses and consumers in the Bank of Canada’s outlook surveys released this week, have many economists expecting the central bank will remain on hold at its Oct. 25 rate decision.
Money markets also scaled down their bets for a rate hike next week after Tuesday’s inflation data showed a return to easing price pressures in September.
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