Contrary to the image of spendthrift Canadian households, a new report from BofA Merrill Lynch Global Research argues that Canadian households have actually quietly started deleveraging — which has implications for consumer spending, economic growth, and interest rates.

“Nobody took the punch bowl away — Canadians simply put their cups down,” the firm says in its report. “Despite stimulative low rates, households have been quietly deleveraging. That trend is putting the brakes on growth today, reshaping the Canadian consumer basket, and will result in a later and slower rate hike cycle than the consensus expects.”

Indeed, the report notes that household debt growth has slowed to its weakest pace seen since 2001. It says that while the debt-to-income ratio continues to rise, other leverage metrics, such as the debt-to-net worth ratio, point to increased restraint.

Moreover, Merrill says that it’s not accelerating debt growth that keeps pushing the debt-to-income ratio higher; “rather, it’s unusually weak disposable income growth.” It says that the ratio really shows that “faster disposable income growth is the key missing element of improved household financial health.”

It also says that there are several reasons why Canadian households appear to be deleveraging, including the increased tightening of mortgage lending standards that is slowing credit growth; and, increased savings reflecting policy incentives such as the introduction of the tax-free savings account (TFSA).

Additionally, amid weak wage growth, “Canadians may have reduced the pace of borrowing in response to lower expectations of future income,” it says. “An alternative and simpler reason is that households may simply be tapped out after a period of low rates and brisk credit growth, and have chosen to limit their dependence on debt.”

The result, the report says, is that household spending is shifting towards necessities such as food, clothing, shelter, with the share devoted to luxuries such as alcohol and recreational goods/ services shrinking.

“Canada’s stealth deleveraging is exerting a real drag on the economy – one that is forestalling any Bank of Canada rate hikes,” the report says, noting that it doesn’t expect rate hikes from the Bank of Canada until the first quarter of 2016, which is later than the consensus of economists expects. And, it says that when rate hikes do begin, “we believe the path will be slow and very tame.”

Given that household leverage is very high, Merrill says that a small increase in rates “will pack a mean punch in terms of a rising debt service burden.” For example, it estimates that a 1% increase in interest rates will directly cut 0.4% from annual GDP growth.

“Even when growth accelerates enough to get the BoC off the sidelines, with household debt levels elevated relative to history, the BoC will only need to tap on the brakes, so to speak, to trigger a meaningful slowdown in the economy’s cruising speed,” it says.