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

MULTIMEDIA: Fair weather, food and fun at VIEX in Nanaimo

A gallery of the second day of the Vancouver Island Exhibition at Beban Park in Nanaimo

Urban planner wants to join city council to help build Nanaimo

Tyler Brown held his campaign launch this week

‘Beauty amongst such tragedy:’ B.C. photographer captures nature’s trifecta

David Luggi’s photo from a beach in Fraser Lake shows Shovel Lake wildfire, Big Dipper and an aurora

Former homeless camp ‘dump site’ being cleaned up along Millstone River

Nanaimo’s Jeff Callaghan has taken up the task of clearing trash from abandoned homeless camp

Discontent City plans another rally in response to threats

‘Emergency rally’ at Nanaimo homeless camp slated for Sunday, Aug. 19

VIDEO: Fires break out in scrap piles at Harmac mill

Nanaimo firefighters got blazes under control in early morning hours Saturday

RCMP looking for missing Duncan teen

Dallas Macleod, 18, was last seen on Aug. 10

Two hurt in car wreck at Northfield intersection

NANAIMO – Honda and Volkswagen crash at 10 p.m. Friday on old Island Highway

Nanaimo’s VIEX country fair underway

Vancouver Island Exhibition happening Aug. 17-19 at Beban Park

Vehicle catches fire on Rutherford Road

NANAIMO – No one hurt in incident, which happened at 2:30 p.m. Friday

VI Raiders score comeback victory against Langley Rams

Nanaimo team erases 31-7 deficit to beat Langley Rams 35-34

Evacuation order issued in Island village due to “risk of falling debris”

Fire continues to threaten town’s only access road

Lions give up late TD in 24-23 loss to Argos

B.C. falls to 3-5, fumbling away last-minute chance in Toronto

Most Read