A major Canadian bank has issued a warning against future interest rate hikes.
In a new report, Canadian Imperial Bank of Commerce (CIBC)(TSX:CM) warns that insolvency rates among Canadian households will likely accelerate if the Bank of Canada further raises interest rates in 2020.
The report comes less than a week after Statistics Canada reported that household debt in the third quarter of 2019 rose. CIBC writes that a Bank of Canada interest rate increase to "anywhere near what was historically neutral … could prove to be overkill."
The bulk of household debt in Canada comes from products like secured and unsecured lines of credit with borrowing rates that move in tandem with the central bank’s benchmark interest rate, according to the report. Those debt instruments are extremely sensitive to higher interest rates.
The Bank of Canada has held interest rates steady at 1.75% since October 2018. In a speech after the central bank’s most-recent rate announcement, Deputy Governor Timothy Lane said policymakers believe Canada’s economy is "near capacity" and that growth is set to accelerate.
The CIBC report found that consumer insolvencies rose most in Ontario and Alberta on a year-over-year basis, with Quebec and Saskatchewan seeing the lowest increases. Furthermore, the report found that insolvencies are affecting Canadians young and old.
