The Bank of Canada has been repeating warnings about dangerous household debt levels for months, however data released on Tuesday shows that people might finally be starting to get the message. The central bank noted that consumer spending has been “moderate” as of late, suggesting that Canada’s craving for credit could be beginning to subside.
The Bank of Canada’s third-quarter monetary report also touched on a new plan for interest rates, pushing back the timing of an increase, while at the same time warning that a boost could occur in order to dissuade individuals from taking on additional debt.
Tuesday’s release was the first time that Ottawa’s policy makers linked household debt to interest rates. According to the report, “imbalances in the household sector” has become a factor that could force an increase in the Bank of Canada’s current setting of one percent.
A Closer Look at Household Debt
The nation’s household debt levelled off at roughly 167 percent of income in the second quarter. Not surprisingly, the Bank of Canada considers this level to be a threat to financial stability. If rates were to increase, a wave of personal bankruptcies would be triggered, causing a wave of home foreclosures that could severely cripple the banking system and housing market.
Interestingly enough, Tuesday’s report shows that household credit growth has stabilized at a rate of approximately 5.5 percent since January. This is considerably slower than the nation’s historical average, which hovers around 8 percent.
“It is possible that the elevated level of household debt is beginning to induce a more cautious attitude among Canadian households,” states the third-quarter report.
With that being said, Canadians still have plenty of incentive to borrow. Mortgage rates are still at historical lows, while the benchmark rate has remained unchanged at 1 percent for 25 months. Banks are still eager to lend, forging ahead with popular government-insured high-risk mortgages. Higher commodity prices are also helping to boost the nation’s overall wealth.
What’s Happening With the Economy?
Tuesday, the Bank codified an explicit commitment to raise interest rates, further reinforcing their stance as guardians of the nation’s financial stability. However, the timeline for this hike is still uncertain. Policy makers have conceded that the nation has had a tougher go of things this year than was initially anticipated. Furthermore, economic expansion in the U.S. is progressing at a gradual pace, while Europe continues to exhibit signs of a continued contraction. While the Bank understands that global financial conditions have improved, sentiment still remains fragile.
The persistent strength of the Canadian dollar, along with ongoing competitive challenges, have caused the Bank to project that the economy will grow by roughly 2.2 percent this year. This is anticipated to grow to roughly 2.3 percent in 2013 and 2.4 percent in 2014.
Readers of the Mortgage Talk Blog can read the official Bank of Canada release online here. A full update of the central bank’s outlook on the economy and inflation, including an overview of risks to the projection, will be published in the Monetary Policy Report released today. The next scheduled overnight rate announcement is set for December 4.