Bank of Canada governor Mark Carney says interest rates may need to rise to discourage excessive borrowing, but adds there is evidence Canadians are already getting the message.
The central banker said in a speech Tuesday that just his warnings about coming higher interest rates appears to be having an influence on consumer behaviour.
"The share of new fixed-rate mortgages has almost doubled to 90 per cent this year, reflecting the combination of attractively priced fixed-rate mortgages and the tightening bias of the Bank of Canada," Carney told an audience of financial analysts in Toronto.
However, Carney also noted "our guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing."
The central bank has not deviated from the one-per-cent policy rate since September 2010, but in the past year has warned that its next move — whenever it comes — will most likely result in higher rates.
Following the speech, Carney said he was encouraged with what's happening in the housing and credit markets following recent measures to make borrowing more difficult and to tighten mortgage rules.
"We've seen (housing) starts coming down... we're seeing some overbuilding still in condos. We have seen the pace of household debt accumulation slow, as intended, from about 10 per cent to a bit more than four per cent. We've seen some adjustments in the resale market, which again is positive," he said.
"But I would caution we have seen in the past, when there have been policy measures taken, movement in these variables that are then followed by a re-accelerations," he added.
"We have to be vigilant ... and adjust if necessary."
Economists have credited the latest action by Finance Minister Jim Flaherty to tighten mortgage eligibility in July with the recent housing slowdown. Carney is saying the Bank of Canada has also played a role, with its guidance about interest rates, and could in the future.
Although primary responsibility for dealing with the housing imbalance does not rest with the central bank, Carney said he would be prepared to act if necessary in the future.
"In current circumstances, the Bank may want to set interest rates higher than would otherwise be warranted to bring inflation back to target within the typical six-to-eight quarter time frame," he said.
CIBC economist Peter Buchanan called the statement largely "hypothetical" given the low inflation expectations in Canada.
"It may be a bit of an effort to assure that the bank still has some cards up its sleeve it can play if there's a problem," he said.
On another subject, Carney gave fulsome support for the U.S. Federal Reserve Board's extremely stimulative monetary policy, which he admitted is helping strengthen the Canada dollar to the detriment of Canadian exporters. But he said if the Fed action was helping the U.S. economy, that was good for Canada and the world.
"If anyone gets the spillover from loose United States monetary policy it's us ... and we recognize even with the impact it has on our currency, it is a net positive for the Canadian economy."
The speech, the first since being named the future governor of the Bank of England starting next July, appeared in large measure an effort to explain, possibly to an overseas audience, his approach to conducting monetary policy and the importance he gives to communicating that policy with credibility.
Carney's argument is that the more transparent and credible a bank is about its future intentions, the more likely players in the economy will act according to expectations.
But, the approach only works if a central bank is credible. A central bank's guidance is not a "promise," he points out, and may have to adjust to whatever the economy throws at them. That's why it is risky to offer guidance too far into the future, he said.
In extraordinary times, which is likely how he views the situation in the United Kingdom, Carney says a central bank may want to ramp up its guidance and messaging to ensure it does not become one of the uncertainties in the economy.
Carney gave his own decision in April 2009 in announcing he intended to keep the policy rate at the "zero lower bound" (0.25 per cent) until the second quarter of 2010 as an example of effective communication.
In effect, he said, the Bank of Canada substituted certainty and duration for reducing the policy rate, something it couldn't do because it was already as low as it could go.
"The bank's conditional commitment succeeded in changing market expectations of the future path of interest rates, providing the desired stimulus and thereby underpinning a rebound in growth and inflation in Canada," he said.
He notes that the U.S. has gone even further by pledging to keep its policy rate unchanged until mid-2015.
And at the zero bound — when rates can't be cut further — Carney says central banks may even want to tie future action to specific levels of economic growth. But he warns there is a danger to such clarity in an uncertain environment.