Carney hints at coming interest rate hike
Warns that Canadian household debt, already at record levels, will rise further
OTTAWA — The Bank of Canada signalled it might seek to curb record household debt levels by raising interest rates for the first time in more than two years, sharpening the divide with other Group of Seven countries focused on easing policy to combat a cooling global economy.
Governor Mark Carney said in Ottawa on Tuesday “some modest withdrawal of monetary policy stimulus will likely be required,” even as the central bank kept the benchmark rate at one per cent, and that “imbalances in the household sector” will influence the timing of any move.
Strategists such as Jimmy Jean at Desjardins Capital Markets in Montreal predicted the bank would drop or weaken its tightening bias.
Canada’s banking system and housing market were unscathed by the global financial crisis, allowing the world’s 11th-largest economy to recover ahead of other G7 countries. The bank said in July the expansion is threatened by consumer debt that’s climbed to 165.8 per cent of disposable income, higher than the U.S. peak before its property bubble burst. Canadian house prices have risen 56 per cent since June 2005.
“They kept the hawkish bias as a warning to consumers and to curb the real estate market,” said Denis Senecal, vice-president and head of fixed income and cash for State Street Global Advisors, Canada, which manages $1.4 trillion in assets.
Carney also said household debts, already at record levels, will rise further. His concern has intensified since April, when he said monetary policy should be the “last line of defence” against high debt.
Finance Minister Jim Flaherty told CBC Radio on Saturday he isn’t planning further measures to restrain the housing market because steps to tighten mortgage regulations have already slowed gains in some of the country’s major cities.
Trading in overnight swaps showed investors had swung to betting on a rate increase instead of a cut by the bank’s May 2013 meeting.
“They have clearly amped it up a notch” on household debt, said Doug Porter, dep- uty chief economist with BMO Capital Markets in Toronto. “I would take it more as a caution that if the slowdown in the housing sector doesn’t stick, the Bank of Canada is ready to do something about it.”
Canada’s bias to boost borrowing costs contrasts with easier monetary policies introduced in recent months by the U.S. Federal Reserve and the European Central Bank. The Fed last month announced a third round of quantitative easing, with monthly purchases of $40 billion of mortgage-backed securities.
In an Oct. 15 speech, Carney left out a reference to tightening monetary policy. At the same time, he foreshadowed Tuesday’s statement by saying “if we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so.”
“The bank caught the market a little bit by surprise on this one,” Mazen Issa, Canada macro-strategist at Toronto-Dominion Bank’s TD Securities unit, said in a phone interview. “Their fidelity toward their hawkish bias … will continue to be tested over the coming months.”
The Bank of Canada said the country’s debt burden will keep rising before “stabilizing” by the end of 2014.
Statistics Canada said Oct. 15 that credit-market debt was higher than earlier estimates while incomes were lower, increasing the ratio of debt to disposable income 10 percentage points to levels above the U.S. peak in 2007.
“Households need to slow their borrowing on their own, or else the Bank of Canada will give them a reason to do so,” Avery Shenfeld, chief economist at CIBC World Markets in Toronto, wrote in a client note.
The Bank of Canada also forecasted consumer spending and business investment will help bring the economy back to full capacity by the end of next year. It raised its 2012 growth forecast to 2.2 per cent from 2.1 per cent, and repeated that growth will be 2.3 per cent next year.