Hey there, time traveller!
This article was published 21/12/2012 (1649 days ago), so information in it may no longer be current.
Canadian households continued borrowing heavily during the fall, Statistics Canada reported this month. Mortgage loans and consumer loans both increased from already high levels so household debt reached 164.6 per cent of disposable income in the third quarter of the year, up from 163.3 per cent in the second quarter.
This was the logical response of Canadian families to the economic realities around them and to the mixed messages the authorities have sent out. The result is a level of debt that will be difficult to reduce when the economic wind changes and lenders start calling in their loans.
The Bank of Canada has kept its administered interest rate steady at one per cent for the last two years, with the result that banks are able to lend to their customers at unusually attractive rates. At the same time, Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have told the public again and again not to go too deep into debt because interest rates will eventually rise and they may be caught with more debt than they can handle.
The net effect is like a merchant who holds a clearance sale, posts low, low prices in the display window and then begs people not to buy. A few customers might heed the sombre warning, but a great many look at the price tag and the buying opportunity and make their own decision.
The central bank will start raising interest rates when it sees signs inflation is going to become a problem, but the bank evidently sees no such signs.
In its Dec. 4 interest-rate announcement, the bank said: "Both total and core inflation are expected to increase and return to two per cent over the course of the next 12 months as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored."
Canadian consumers could reasonably conclude low interest rates have a good distance to run yet.
The latest information on Canadian economic growth must confirm this impression. Statistics Canada reported this week that real gross domestic product edged up 0.1 per cent in October, following no growth in September and a 0.1 per cent decline in August. An optimist might conclude the third quarter ended stronger than it started, perhaps foreshadowing stronger growth in the final months of the year. But the monthly variances reported are so slight that they add up to something more like stagnation. They certainly give borrowers and lenders no reason to expect an early change in the interest rates on consumer loans or mortgages.
This, then, is the position that the new governor of the Bank of Canada will inherit when Mr. Carney moves to London in July to take up his new post as governor of the Bank of England. Canadian households, having taken advantage of the credit clearance sale that started in 2009, will be up to their eyeballs in debt. Any sudden or substantial rise in interest rates will strand many borrowers with interest payments they cannot sustain.
After a quarter-century of stable prices, Canadians do not regard inflation as a problem worth worrying about. The central bank, however, must always worry about inflation, even when the rest of mankind does not. It might reappear suddenly, like a thief in the night -- for example in response to massive monetary expansion in the United States or in response to an unexpected rise in commodity prices. The central bank needs freedom to manage its interest rates so as to keep prices stable. As household debt soars higher and higher, the bank's freedom of action is narrowed because the social and financial cost of an interest-rate rise become more difficult to accept.
The arrival of a new governor at the Bank of Canada in July may mark the moment for a fresh look at the low-interest policy.