No hikes, still yikes: It'll take more than BoC rate cuts to fix Canada's grim debt outlook

Though the market expects the Bank of Canada (BoC) to announce further rate cuts, a new report shows it might take more than that to brighten Canadians’ outlook on debt.

A BoC interest rate cut is widely expected for Wednesday, July 24.

The MNP Consumer Debt Index measures Canadians’ attitudes toward their consumer debt. It gauges their ability to pay their bills, endure unexpected expenses, and absorb interest-rate fluctuations without approaching insolvency.

Ipsos conducts the surveys and updates them quarterly on behalf of MNP Ltd., the country’s largest insolvency firm. The Index, which is described as “an industry-leading barometer of financial pressure or relief among Canadians,” published a new report on Monday.

Experts at Ipsos collected data from 2,000 Canadian adults between June 6 and 11. The Index has dropped to 85 points, down six from the previous quarter.

Two-thirds (66%) said they desperately need interest rates to go down, while 56% were concerned that they may not decline quickly enough to provide the financial relief that they need.

Nearly three in five (57%) said interest rates must drop much further before their financial situation significantly improves. This number has increased by three points since the last quarter.

These findings are worrying, given that the survey data compilation began a day after the BoC announced its first rate cut in over four years.

Experts have since been predicting more rate cuts will follow, considering several things. Falling inflation in the US could impact interest rates in the country, and the pattern could trickle into Canada.

“While the BoC has already made its first rate cut ahead of the US Federal Reserve, the rising likelihood the American central bank will be in the position to do so soon will support further downward movement on rates in Canada without the risk of shocking our currency,” Penelope Graham, mortgage expert at Ratehub.ca, told Daily Hive in an email.

Before the latest US CPI data came out, more doubts about a rate cut floated in the Canadian market because May CPI data (2.9% rise) showed higher numbers than April (2.7% rise). The latest Canadian CPI data for June, released Tuesday, shows another 2.7% rise.

But we’re generally moving toward the BoC’s 2% target inflation rate faster.

On Wednesday, thousands of hopeful homebuyers will tune in for the Bank’s Monetary Policy Report.

On July 24, we’ll publish our Monetary Policy Report, providing you with the latest insights on Canada’s economy. https://t.co/fxzxiBjOPP#cdnecon

— Bank of Canada (@bankofcanada) July 22, 2024

But could this good news have come a bit too late?

Perhaps the most alarming finding of the Ipsos survey was that 47% of Canadian participants agreed they are “still concerned with their ability to repay their debts,” even if interest rates decline.

As last quarter’s Index showed, nearly half (46%) of Canadians are still “$200 or less away from failing to meet all their financial obligations.”

“Canadians may have hoped for a more significant cut to interest rates or to experience a quicker impact from the reduction. This leaves many individuals feeling disheartened,” said Grant Bazian, president of MNP Ltd. “With the prices of many daily necessities still high, many have not seen the meaningful decrease in their monthly expenses needed to ease their financial burdens.”

“Some individuals are living paycheque to paycheque, struggling to make ends meet and cover day-to-day necessities. Others are so deeply indebted that their financial challenges won’t be manageable, regardless of interest rates,” the expert added.

MNP’s findings show that Canadians with an income of $40,000 or less are “significantly more likely” to say they’ve accumulated so much debt that lower interest rates won’t provide much relief.

“About two in five intend to save more (45%) or accelerate their debt repayment (36%) if interest rates drop in the next three months, potentially counting on interest rate cuts to improve their financial situation,” the report reads. “However, nearly three in 10 (29%) believe that declining interest rates won’t affect them in any way.”

Who does a rate cut help?

Ratehub.ca’s Graham told us that mortgage rates are trending lower overall. She believes it’s a great time to rate shop for those seeking pre-approval.

“This secures their rate for up to 120 days and protects them in case rates unexpectedly rise in the near future,” the expert advised.

“While it may be tempting to get a variable mortgage rate when cuts seem likely, it’s important to take your personal risk tolerance and financial situation into account,” she stated. “If we’ve learned anything from the BoC in the last few years, it’s that nothing is certain when it comes to rate direction.”

Who does a rate cut hurt?

Though most Canadians, especially mortgage borrowers and aspiring homeowners simply looking to buy for residential purposes, could reap the benefits of expected rate cuts, not everyone will welcome it with gleaming positivity.

“It’s not a cheerful scenario for passive investors and savers whose returns fluctuate with Canada’s prime rate,” Graham commented. “Those with Guaranteed Income Certificates (GICs) and high-interest savings accounts will see their earnings lower should the Bank of Canada implement a cut this month.”

Want to keep up with BoC updates and commentary? There are four announcements left for 2024. Tune in on these dates.