Interest rates are likely to come down next year, Royal Bank of Canada Chief Executive Officer Dave McKay said, allowing for the lender’s customers to avoid major pain when the majority of its mortgage book reprices in 2025 and 2026.
(Bloomberg) — Interest rates are likely to come down next year, Royal Bank of Canada Chief Executive Officer Dave McKay said, allowing for the lender’s customers to avoid major pain when the majority of its mortgage book reprices in 2025 and 2026.
“We should be fine,” McKay said Wednesday at the Scotiabank Financials Summit. “We have lots of room to manage a soft landing here and we expect that to happen.”
Higher borrowing costs have cut into mortgage growth at Canada’s biggest banks, with would-be homebuyers sitting on the sidelines. At the country’s five largest lenders, including Royal Bank and Toronto-Dominion Bank, residential loan growth slowed to 4% in the fiscal third quarter, compared with annual growth of 9.8% a year earlier. Meanwhile, the amount of impaired loans in the five firms’ core Canadian banking businesses almost doubled from a year earlier.
Read more: Mortgage Growth Buckles Under Weight of Rate Hikes in Canada
The Bank of Canada began its recent rate-hiking campaign in March 2022, raising its trend-setting policy rate from 0.25% to, most recently, 5%, the highest in 22 years.
Read more: Bank of Canada Holds Rates at 5%, Sees Excess Demand Easing
Borrowers in the US, meanwhile, are “more resilient than the Canadian consumer,” McKay said, given that many enjoy the benefit of 30-year, fixed-rated mortgages that don’t adjust in the same way as home loans to the north do.
“But there’s still strong spend, which is why inflation is so persistent in the US, because you’ve got a very strong consumer,” he said. That’s different from Royal Bank’s home country, where you have a “more conservative consumer, growth is slowing faster, you’re seeing certainly those mortgage payments increase and therefore the economy’s cooling a little bit faster in Canada.”
Canadian Imperial Bank of Commerce CEO Victor Dodig shares a similar view, saying at the same conference later Wednesday that he believes “rates next year will start to head lower as the economy starts to course correct.” He predicted a “relatively constructive landing,” adding that he’s not worried about the bank’s mortgage portfolio from a credit standpoint.
While Dodig said he’s concerned about the effect of higher rates on CIBC customers, he noted that many have significant equity in their homes and a cushion of additional savings built up during the pandemic — an average of about $10,000 more per mortgage holder — which should give them an ability to withstand higher monthly payments under current interest rates.
Read more: CIBC Misses Estimates as Provisions for Souring Loans Surge
–With assistance from Stephanie Hughes.
(Updates with CIBC CEO’s comments in last two paragraphs.)
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