Poloz: Canadians owe $2T as central bank mulls rate hike

Andy Blatchford, The Canadian Press</span>
Published Tuesday, May 1, 2018 2:54PM EDT
Last Updated Tuesday, May 1, 2018 4:48PM EDT

OTTAWA -- Bank of Canada governor Stephen Poloz says Canadians have amassed a $2-trillion mountain of household debt that is now casting a big shadow over the timing of his next interest rate hike.

In a speech Tuesday in Yellowknife, Poloz said the pile has been growing for three decades in both absolute terms and when compared to the size of the economy -- and about $1.5 trillion of it currently consists of mortgage debt.

The central bank has concerns about the ability of households to keep paying down their high levels of debt when interest rates continue their rise, as is widely expected over the coming months.

Poloz has introduced three rate hikes since last July following an impressive economic run for Canada that began in late 2016.

But the central bank stuck with its benchmark rate of 1.25 per cent last month as it continued its careful process of determining the best juncture for its next hike.

In prepared remarks of his address to the Yellowknife Chamber of Commerce, Poloz said the volume of what Canadians owe is an important vulnerability for individuals and the entire economy. He added that it's one of the key reasons why the bank has been taking a cautious approach to raising its trend-setting rate.

"This debt still poses risks to the economy and financial stability, and its sheer size means that its risks will be with us for some time," Poloz said.

"But there is good reason to think that we can continue to manage these risks successfully. The economic progress we have seen makes us more confident that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed."

Poloz said debt is a natural consequence of several factors, including the combination of a strong demand for housing and the prolonged period of low interest rates maintained in recent years to stimulate the economy.

The governor also provided detail on issues the bank is examining as it considers the timing of its next rate increase.

If it raises rates too quickly, the bank risks choking off economic growth, falling short of its ideal inflation target of two per cent and could lead to the type of financial stability risk it's trying to avoid, he said.

But if the governing council lifts the rate too slowly, Poloz said it could intensify inflationary pressures to the point it overshoots the bank's bull's-eye. Poloz added that moving too gradually could also entice Canadians to add even more debt and further boost vulnerabilities.

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