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

Fort St. James gets a new CAO

Melany Helmer comes with years of senior management experience

Northwest mobile unit to help those at heart of mental health, addiction crisis

Province, Northern Health unveils new unit in Terrace to bridge gaps in services

Move natural gas pipeline, MP suggests

Coastal GasLink could then avoid opposition

B.C. minister says rural internet is ‘railroad of the 21st century’

Jinny Sims talks details about the $50-million provincial and possible $750-million federal funds

Zero-interest student loans a huge relief: CMTN student union

Parliamentary secretary hears from Terrace students, alumni and staff

Sparks fly as SUV speeds down wrong side of Highway 1 trying to flee RCMP

Captured on video, the vehicle headed westbound against oncoming traffic before crashing

Calgary captain has 3 points as Flames torch Canucks 3-1

Giordano leads way as Alberta side cracks 100-point plateau

1,300 cruise ship passengers rescued by helicopter amid storm off Norway’s coast

Rescue teams with helicopters and boats were sent to evacuate the cruise ship under extremely difficult circumstances

B.C. university to offer first graduate program on mindfulness in Canada

University of the Fraser Valley says the mostly-online program focuses on self-care and well being

Province announces $18.6 million for B.C. Search and Rescue

The funding, spread over three years, to pay for operations, equipment, and training

Late-season wave of the flu makes its round in B.C.

BC Centre for Disease Control reported 50 per cent jump in flu cases in first weeks of March

Tofino’s housing crisis causing some to seek shelter at the local hospital

Tofino’s housing crisis is pushing the town’s ‘hidden homeless’ population into the forefront.

Sentencing judge in Broncos crash calls for carnage on highways to end

Judge Inez Cardinal sentenced Jaskirat Singh Sidhu to eight years

2 fires in Victoria caused by cigarettes prompts warning from deputy fire chief

Two separate fires caused by cigarette butts were avoidable

Most Read