The pandemic paradox: Surging savings, surging debt leave Bank of Canada with balancing act
The Bank of Canada has faced unprecedented challenges when it comes to monetary policy since the start of the COVID-19 pandemic, launching drastic interest rate cuts to combat the initial slowdown followed by a rapid tightening cycle to fend off inflation. Making things more complicated has been that economic policy hits different households in different ways, an effect that has been exaggerated in the recent extreme conditions, according to Bank of Canada deputy governor Sharon Kozicki, who addressed the issue during a Sept. 19 speech at the University of Regina.
The Financial Post’s Denise Paglinawan highlights five key takeaways from the deputy governor’s speech:
While the Bank of Canada generally focuses on aggregate economic data, Kozicki said averages do not always tell the full story as each household is unique and has experienced the unusual economic events of the past few years in very different ways.
Households went into the pandemic with different levels of wealth, debt and income and the monetary and fiscal policies implemented during the pandemic had differing impacts.
Lockdowns, for example, allowed many middle- and upper-income households, especially those who owned homes, to accumulate a significant amount of savings, while others racked up significant debt.
Those increased savings, combined with low interest rates at the time and a desire for more space as people worked from home, fuelled a surge in demand for real estate. But the boom affected individual households in starkly different ways, Kozicki said, which influenced subsequent policy deliberations.
As some households took on high levels of mortgage debt to finance real estate purchases, those who already owned saw their home equity increase as
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