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

Quesnel’s Interclub Gymnastics team swings, spins and shimmies to wins in Prince George

Interclub puts focus on performance, says program co-ordinator Elizabeth Floyd

Partners for Healthier Communities: North Cariboo seeking proposals for local food security projects

Groups with ideas or projects that promote healthy eating and food security are encouraged to apply

A quacking good time on Dragon Lake

Mother’s day paddle was excellent exercise and an informative journey

Letter: climate advocates meet with Donna Barnett and Coralee Oakes

A B.C. group travelled to Victoria to lobby for climate action

Liquor licence to be pursued for West Fraser Centre

North Cariboo Joint Planning Committee voted unanimously to obtain liquor licence for Quesnel’s WFC

Vancouver Island girl scores with winning song for BC Summer Games

‘Colours’ is a perfect theme for 2018 BC Summer Games

Feds limit chinook fishery to help killer whale recovery

Chinook is main food source for only 76 southern residents killer whales left

B.C. mom who died just before daughter’s wedding wanted family to be happy: twin

Ann Wittenberg was pulled into the ocean while on a surf board in Tofino last weekend

Courtenay-Alberni MP calls for lifeguards at popular surf spot near Tofino

The Pacific Rim National Park Reserve is defending its decision to cancel the surf guard program.

Harvey Weinstein to surrender in sex misconduct probe: officials

Would be first criminal charge against Weinstein since scores of women came forward

Media are not an arm of the police, Vice lawyer tells Supreme Court hearing

Ben Makuch challenges Ontario Court of Appeal ruling that he must give materials for stories to RCMP

B.C. launches plan to tackle doctor shortage, emergency room congestion

John Horgan aims to set up regional primary care networks in a ‘team-based’ approach

Vancouver, Squamish pipeline challenges dismissed by court in B.C.

Justice Christopher Grauer ruled the province’s decision to issue the certificate was reasonable

Early learning programs for Indigenous kids get $30M boost

B.C. government to help expand Aboriginal Head Start Association programs with three-year funding

Most Read