Canada Household Debt: Carney Says He May Raise Rates If Borrowing Becomes Excessive
Bank of Canada governor Mark Carney could look to raise interest rates if excessive borrowing by Canadian consumers and companies risks hurting the economy.
In a speech in New York, Carney said Friday that low interest rates over a prolonged period can cloud financial judgments and prompt companies and people to borrow too much for too long.
But, he said the central bank's inflation-fighting policy framework allows flexibility to address such worries.
While the first line of defence against a buildup of consumer and corporate debt is regulation and supervision of the banking and credit industries, Carney said interest rate policy can also be used.
"Monetary policy has a broad influence on financial markets and on the leverage of financial institutions that cannot be avoided,'' Carney said in his speech.
"This bluntness makes monetary policy an inappropriate tool to deal with sector-specific imbalances but a valuable one to address imbalances that may have economy-wide implications.''
Carney noted that Canadian banks are reinforcing their balance sheets to meet new international rules ahead of schedule and the federal government has tightened home mortgage financing rules to help prevent consumers from borrowing more than they can handle.
However, the Bank of Canada warned earlier this week that Canadians -- with higher mortgage debt linked to rising house prices in many markets -- are becoming increasingly vulnerable to a housing slump.
The bank did not suggest a U.S.-style housing collapse for Canada, but noted that home prices have risen sharply in the past dozen or so years along with debt, as homebuyers have needed both bigger mortgages to buy homes and used equity from higher home values to finance other purchases.
The central bank has calculated that a 10 per cent drop in home prices could generate a one per cent decline in consumption, which would slow economic growth.
Carney's speech came ahead of a meeting of G20 finance ministers and central bank governors scheduled for the weekend where they are expected to focus on promoting global economic stability and growth.
The central bank recently completed a review of its monetary policy framework and reaffirmed its position on annual inflation targets of two per cent, within a broad range of one to three per cent.
Under its framework, the bank aims to return inflation to a medium-term target while limiting volatility in other areas in the economy.
However, Carney noted that flexibility in the time it takes to return inflation to the target rate cannot be arbitrary and needs a clear and transparent approach.
The U.S. Federal Reserve has said that its fed funds rate is expected to remain at exceptionally low levels at least through late 2014.
"Extraordinary forward policy guidance within a flexible IT framework helped the Bank of Canada provide additional stimulus when it was needed and should help the Fed do the same. The Fed's experience with a published interest rate path in conventional times, when they return, is something we will watch with interest,'' Carney said.
The Bank of Canada's key overnight rate has been set at one per cent for more than a year.
Inflation edged up in January to 2.5 per cent, boosted by an increase in gasoline prices. However, the underlying core inflation rate _ which excludes volatile items such as some fresh food and gas _ rose to 2.1 per cent, one tick higher than the Bank of Canada's target.
1. RISING HOUSEHOLD DEBT
Canada's household debt burden climbed to yet another record high in the third-quarter, prompting Bank of Canada Governor Mark Carney to call it <a href="http://www.montrealgazette.com/business/Mark+Carney+again+sounds+alarm+rising+Canadian+household+debt/5856418/story.html" target="_hplink">"the greatest risk to the domestic economy</a>." At 150.8, <a href="http://www.reuters.com/article/2011/12/14/us-economy-debt-idUSTRE7BC2DY20111214" target="_hplink">Canada's debt-to-income ratio is now higher than in the U.S. or the U.K</a>. Meanwhile, household net worth fell, which, as many observers have warned, has made Canadians more vulnerable to adverse economic shocks.
2. SLUGGISH CONSUMER DEMAND
Though BMO's Doug Porter maintains that low interest rates and modest job growth should prevent household debt issue from becoming "a clear and present danger to the outlook in the year ahead," he predicts that the debt burden is likely to increase. Unlike in the U.S., Canada's consumer recession was "very mild," leaving scant room for growth in consumer spending, he says. "At best, we see consumer spending growing in line with income next year," he said. "We've actually pegged it a little bit below income growth next year ... at less than two per cent in 2012." (FREDERIC J. BROWN/AFP/Getty Images)
3. EUROZONE INSTABILITY
When TD cut its 2012 outlook for the Canadian economy earlier this week to 1.7 per cent, the bank cited a deepening fiscal crisis in the eurozone as one of the primary factors. More bearish than BMO, which on Thursday held its expectation for Canada's GDP growth next year at two per cent, TD is forecasting "a deterioration of financial conditions and a significant European recession in the first half of next year." "<a href="http://www.td.com/document/PDF/economics/qef/qefdec11_can.pdf" target="_hplink">A deepening recession in the region will exert a significant drag on the global economy</a>," the bank maintained. "Canada will be negatively impacted through weaker commodity prices, confidence and export growth. Labour markets will also soften as a result." (ERIC FEFERBERG/AFP/Getty Images)
4. CHINA LOSING STEAM
The signs are abundant that the world's largest economy is cooling. Mounting local government debt and slowdowns in everything from industrial production to <a href="http://www.cbc.ca/news/business/story/2011/12/09/china-economy-slows.html" target="_hplink">the housing market has led many to predict softer economic growth in 2012</a>. "<a href="http://www.npr.org/2011/12/13/143623874/after-boom-chinas-property-market-heads-lower" target="_hplink">Real estate is a locomotive industry that leads at least 58 other industries</a>," Cai Weimin, who runs a real estate think tank in Shanghai, told NPR. "Doomsday probably won't come true in 2012, but for the Chinese economy, 2012 will be a very tough year. (Aaron tam/AFP/Getty Images)
5. GROWING INCOME GAP
As Canada's rich-poor divide widens, some experts warn that the concentration of wealth at the top of the income distribution and stagnating wages for everyone else could be a drag on the economy. Though Canada's income gap is not as pronounced as in the U.S., Canadian Centre for Policy Alternatives economist Armine Yalnizyan argues that the growing divide is bad for business all the same. <a href="http://www.huffingtonpost.ca/news/mind-the-gap" target="_hplink"><strong>Mind The Gap: Our examination of Canada's growing income divide</strong></a> "<a href="http://www.canadianbusiness.com/article/39123--inequality-is-bad-for-business" target="_hplink">Real growth in purchasing power has been restricted to a small fraction of Canadian consumers</a> in what is already a small market," she maintained in an op-ed in Canadian Business magazine. "Throttling aggregate demand slows the economy for everyone." Anne Golden, president and CEO of the Conference Board of Canada, echoes this sentiment. "Growing inequality distorts consumer patterns," she told The Huffington Post in a recent interview. "Most businesses, except maybe for Porsche [dealerships], rely on rising purchasing power of the many, not the few, to deliver growth and profits." (ADRIAN DENNIS/AFP/Getty Images)