Bank of Canada Governor Stephen Poloz is grappling with powerful and conflicting economic forces that are complicating his efforts to wean the economy off the low interest rates that are fuelling excessive borrowing.
On the one hand, the economy has picked up momentum and is running near full capacity, with unemployment lower than it has been since the 1970s, making extremely low interest rates no longer necessary.
And yet, in a speech on Tuesday in Yellowknife, Mr. Poloz also highlighted a host of reasons for moving cautiously, including the vulnerability of heavily indebted households as borrowing costs rise, uncertainty over the North American free-trade agreement and lingering effects of the 2008-09 financial crisis.
“This debt still poses risks to the economy and financial stability, and its sheer size means that its risk will be with us for some time,” he said. “But there is good reason to think we can continue to manage these risks successfully.”
Economists said Mr. Poloz is preparing borrowers and investors for a continuation of gradual rate hikes over the coming months. The central bank has raised its key interest three times since last June.
“That rates are going up is not a hard call to make,” said Toronto-Dominion Bank economist Brian DePratto. “The key question is when.”
Much of Mr. Poloz’s speech focused on the dangers of rising household debt. But Mr. DePratto pointed out that that the central bank is “largely responsible” for the problem, and has the power to stop it.
“You don’t have to be an economist to know that raising the price of something lowers its relative appeal,” he said.
The Bank of Canada will continue “tapping the brakes” with rate hikes, perhaps as early as its next rate-setting announcement on May 30, Bank of Nova Scotia economist Derek Holt said.
Several major lenders, including Royal Bank of Canada and Toronto-Dominion Bank, raised their posted rates on fixed-rate mortgages in recent days, after sharp increases in government bond yields. RBC’s official rate on a five-year mortgage is now 5.34 per cent, up from 5.14 per cent.
Higher rates coincide with an economy that appears to be perking up. Statistics Canada reported on Tuesday that the economy surged in February after a slow start to the year. Real gross domestic product rose 0.4 per cent month over month, the strongest one-month growth since last spring, reversing course after a decline of 0.1 per cent in January.
The debt of Canadians has been steadily rising over the past 30 years relative to the size of the economy and to incomes. The $2-trillion of total debt, includes $1.5-trillion in mortgages.
The average Canadian now owes $1.70 for every dollar they earn in a year – up from $1 of debt for every $1 of income 20 years ago.
And the share of Canadians with a mortgage is also up sharply, particularly for homeowners between the ages of 55 and 64, he said.
The central bank is keeping a wary eye on people with extremely high debt relative to income. Mr. Poloz said about a fifth of that debt is held by households that owe at least 350 per cent of their annual gross income.
And he issued a pointed warning to these borrowers about the dangers posed by rising rates or a loss of a job on their ability to repay: “It is important for these households to understand how personally vulnerable they may be.”
The Bank of Canada faces a tricky balancing act. Strong demand for housing and a long period of low interest rates swelled debt. But the wider economy still needs stimulus because of economic weakness related to the 2008-09 financial crisis, Mr. Poloz said.
The Globe and Mail, May 1, 2018