Bank of Canada Deputy Governor Timothy Lane said a long period of rising consumer debt and low interest rates pose a major risk to the country’s economy.
“Consumers have taken advantage of the stimulative financial conditions, including low borrowing costs and easy availability of financing,” Lane, 57, said in the text of a speech today at Harvard University in Cambridge, Massachusetts. “In doing so, they have pushed household debt to levels that pose a significant risk.”
Canada’s central bank kept its benchmark interest rate at 1 percent Jan. 23, where it has been since September 2010, and said the case for an increase was “less imminent” while cutting its economic growth forecast. Lane’s speech didn’t mention the outlook for the policy rate, and comes before Governor Mark Carney’s testimony tomorrow on the economy to Canadian lawmakers in Ottawa.
More houses are being built than what is in line with “demographic trends,” and some housing markets have “stretched valuations,” Lane said today.
Canada required stimulative policies to deal with a period of weak global growth following the world financial crisis, including the time it’s taking for the U.S. to reduce its debt levels, Lane said.
“This headwind has, in particular, been holding back Canada’s exports, which are far from recovering from their plunge at the start of the recession,” he said.
The risks from a period of “low for long” interest rates include investors that take excessive risks to generate bigger returns, as well as household imbalances, Lane said.
Canada’s housing market has “moderated” in recent months, Lane said, echoing comments Carney made in January. The central bank has predicted that consumer debt will stabilize around the current record of 165 percent of disposable income.
There are still risks that “household spending could regain momentum or that a more sudden weakening could occur,” Lane said.