Governor of the Bank of Canada Stephen Poloz speaks during a press conference on the Bank of Canada’s interest rate announcement and Monetary Policy Report in Ottawa on Wednesday, April 18, 2018. 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. THE CANADIAN PRESS/Justin Tang

Bank of Canada says Canadians owe $2 trillion as it mulls next rate hike

Bank of Canada governor Stephen Poloz says Canadians have amassed a $2-trillion mountain of household debt

Canadians have amassed a $2-trillion mountain of household debt that’s casting a big shadow over the timing of the Bank of Canada’s next interest rate hike, governor Stephen Poloz said in a speech Tuesday in Yellowknife.

To Poloz, the “sheer size” of debt burden also means its associated risks to endure for a while, although he’s optimistic the economy can navigate them.

The debt pile, he said, 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.

“This debt has increasing implications for monetary policy,” he said in his address to the Yellowknife Chamber of Commerce.

Related: Bank of Canada holds benchmark interest rate as economic growth moderates

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. The bank’s next announcement is May 30, but many experts only expect Poloz’s next increase to come at July’s meeting.

Poloz said Tuesday that the volume of what Canadians owe is one of the key reasons why the bank has been taking a cautious approach to raising its trend-setting rate. He called it an important vulnerability for individuals and leaves the entire economy exposed to shocks.

“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.

In his speech, he also noted several other areas of concern the bank is monitoring closely as it considers future hikes. They include the economic impacts of stricter mortgage rules, the ongoing uncertainty about U.S. trade policy, the renegotiation of the North American Free Trade Agreement and a number of competitiveness challenges faced by Canadian exporters.

“These forces will not last forever,” Poloz said.

“As they fade, the need for continued monetary stimulus will also diminish and interest rates will naturally move higher.”

Related: Feds’ unheralded $102B rainy day fund kept for the improbable, like cyberattacks

Andy Blatchford, The Canadian Press

Like us on Facebook and follow us on Twitter.

Just Posted

Man who fled cops and dumped truck at golf course pleads guilty

Incident in January involved arrests by Mission and Ridge Meadows RCMP

Inaugural Fraser Valley Comedy Festival features two shows in Mission

One show is at the Stage on Oct. 20, the other is at the Clarke Theatre on Oct. 25

‘Police are ready’ for legal pot, say Canadian chiefs

But Canadians won’t see major policing changes as pot becomes legal

Fundraisers planned to help rebuild Mission’s Silverhill Hall

A Halloween party and a GoFundMe page created to help raise money

Hundreds attend safety fair held by Mission Fire Rescue Services

Firefighters presented important safety information along with interactive games and fun activities

Rick Mercer says pot is ‘excruciatingly boring’

Comedian hopes Canadians will move onto something else once marijuana is legalized

Canada Post union issues strike notice; rotating strikes could begin Monday

Union says rotating strikes will begin if agreements aren’t reached with bargaining units

Carole James avoids questions on B.C.’s payroll tax (with video)

Green MLA Adam Olsen cites huge tax increase for local business

BCTF wins grievance over teacher shortage in public schools

Arbitrator found Chilliwack school district did not hire enough on-call teachers or librarians

2 charged for feeding B.C. bear Tim Horton’s timbits

Court documents show that Randy Scott and Megan Hiltz have both been charged with feeding or attempting to feed dangerous wildlife.

Killer-rapist Paul Bernardo set for parole bid after 25 years in prison

Bernardo’s parole hearing at the Bath Institution is expected to attract numerous observers

Feds aiming to select preferred design for $60B warships by end of month

Defence insiders say the government wants to select a design by the end of the month from among three options submitted by several of the largest defence and shipbuilding companies in the world.

B.C. city wants control over its cannabis advertising rules

Without a say, towns and cities risk Washington-State-style flood of advertising, proponent says

Most Read