OTTAWA – Bank of Canada governor Mark Carney issued a caution toCanadians and the chartered banks Wednesday: interest rates are goingup and they should take care not to get caught out.
Expanding onprevious warnings, the bank governor told a business audience inToronto that the current low interest rate environment may be luringCanadians to borrow too much, and banks to extend loans they will laterregret.
Canadians have taken on more debt even during the recession, which is unusual, Carney said.
But while Canadians may be able to afford the added debt burden nowwhen interest rates are at historic lows, they may get caught shortwhen rates return to more normal levels.
"The combination ofsustained growth of household debt relative to income and a risinginterest rate environment could increase the vulnerability ofhouseholds to an adverse shock," he said in notes on the speechreleased by the central bank in Ottawa.
The bank governor didnot say when he expects interest rates to start rising, althougheconomists believe Carney will make his first move on his lower-bound0.25 per cent policy rate in mid-2010. That would be after the bank'sconditional commitment to stand still on the rate until the end of June.
It is not the first time Carney and the central bank have voiced suchconcerns, most recently last Thursday in the central bank's semi-annualFinancial Systems Review, which cited household debt as the number onerisk factor to Canada's economic well-being.
Since, there hasbeen more evidence that Canadians have not paid heed. The Canadian RealEstate Association reported Tuesday that Canadians continued to snap uphouses at near-record levels, increasing their purchases of resalehomes by 73 per cent in November.
Carney said there are already signs that Canadians are getting in over their heads.
He notes that personal bankruptcies jumped by 41 per cent in theJuly-to-September period from a year ago and are now at the highestlevel as a proportion of the population since 1991.
As well,delinquency rates are rising and the proportion of mortgage payments inarrears by three months or more have increased by 50 per cent in thepast year.
The Canadian economy is particularly vulnerable tohousehold defaults since consumers are expected to be the key driver ofeconomic recovery, the governor said.
But Carney added that while Canadian consumers have a responsibility to avoid credit risks, so do financial institutions.
"Financial institutions should actively monitor risk stemming fromhouseholds and not take comfort from mortgage insurance and pastperformance of household credit," he said.
"As our simulationssuggest, the overall credit profile of Canadian households could wellshift if debt continues to grow at current rates."
Carney noted that he still believes the Canadian economy is coming out of the recession and will grow in the next few years.
He said he expects Canada to outperform the other G7 countries with athree per cent advance in 2010, but said growth going forward will bemore modest than previous post-recession bounce-backs.
