Carney continues to urge caution on borrowing
Bank of Canada governor Mark Carney had some words of advice to heavily indebted households, telling them again Tuesday to use “prudence and caution” because borrowing costs can only go up.
Speaking to the House of Commons finance committee one week after the central bank held its key interest rate at one per cent, Carney said “mortgage rates are extremely attractive and that accounts for some of the move-up in (housing) valuation.”
But he added consumers cannot rely on lending costs “staying there forever.”
His remarks followed the release of two reports earlier Tuesday that suggested consumers are taking a more cautious approach to spending.
Statistics Canada said retail sales fell 0.2 per cent in February, while the Conference Board of Canada reported a significant drop in consumer confidence last month, following three consecutive monthly increases.
Carney said when it comes to household debt “the message is one of prudence and caution,” adding the average home price in Canada is about 4.75 times people’s income, while the historic average is closer to 3.5. Household debt to disposable income is running at about 152.9 per cent.
“Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk,” he said.
Carney also had some cautious words on the economy, saying “despite recent improvements to the outlook for the global and Canadian economies, risks remain elevated.”
“The three main upside risks to inflation in Canada relate to the possibility of higher-than-expected oil prices, stronger-than-expected growth in the U.S. economy and stronger momentum in Canadian household spending,” he said.
But he reiterated recent statements that “reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term.”
The central bank, which has kept rates at a near-record low since September 2010, surprised markets last week when it explicitly mentioned a rate increase might be needed because of a stronger economy and underlying inflationary pressures.
The cheap money has encouraged Canadians to borrow more heavily, particularly against the equity in their homes, prompting repeated alerts from the bank about possible calamitous consequences once rates start to rise.
Carney, who says Canadians cannot keep borrowing so heavily against the value of their homes, said financial authorities were looking closely at levels of household debt and ways to contain the problem. He also made it clear that too tight a clampdown could hurt economic growth.
“There’s always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy,” he said.
Carney also noted Canadians appear to be listening to repeated warnings not to take on too much debt and to prepare for higher rates.
“What we’ve also seen in recent months is that the proportion of variable-rate debt on new debt that’s being taken on — new mortgages being taken on — has gone down quite substantially,” he said.
Carney’s comments came as global markets clawed back some of their losses from Monday’s dramatic selloff, sparked by new eurozone debt fears and a spate of weak economic data.
Earlier Tuesday, Statistics Canada reported that retails sales declined 0.2 per cent in February, short of economists’ forecast for an actual gain of 0.1 per cent. On the same day, Conference Board of Canada said its consumer confidence fell 4.5 points in April.
“The consumer is in a cautious frame of mind,” Douglas Porter, deputy chief economist at BMOCapital Markets, wrote in response to the data. “High debt loads, high gas prices, and the prospect of higher interest rates suggest that caution will persist.”
That Conference Board of Canada’s report showed confidence levels falling across the country — and consumers growing leery of big-ticket spending.
While Canadians’ attitudes about their current financial situations were largely unchanged, the balance of opinion on where their finances will be in six months is “at its secondlowest since spring 2009,” the Conference Board said. Similarly, negative attitudes about future employment prospects are at their lowest point in more than two years.
“Given their current pessimism when it comes to their finances and jobs, it is not surprising that the share of Canadians who consider now a good time to make a major purchase has fallen,” the report said.