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Mark Carney’s battle: Household debt vs. growth

Statistics Canada revisions last week left the ratio of household debt to income above 160 per cent.

chris sadowski/iStockphoto

The Bank of Canada made two significant additions to its policy statement Tuesday.

Right there at the end of the third paragraph – the one that describes Canada's economy – the central bank notes that the dollar's strength is "being influenced by safe haven flows and spillovers from global monetary policy."

Bank of Canada Mark Carney has said as much on several occasions, but this is the first time he and his deputies have opted to make mention of it in their official policy statement. The message: stop pestering us to weaken the currency; there's nothing we can do about it.

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International investors are attracted to Canada not only by a higher interest-rate spread, but because they feel comfortable they will get their money back. That motivation likely wouldn't be deterred by cutting the benchmark rate to 0.75 per cent from the current 1 per cent. The reference to "spillovers from global monetary policy" mostly is a nod to the Fed's bond-buying program, which is putting downward pressure on the U.S. dollar. The market doesn't fight the Fed, and the Bank of Canada shouldn't either. In fact, Bank of Canada Governor Mark Carney noted last week that Fed policy was a "modest" positive for Canada since it is improving economic conditions in Canada's largest trading partner.

The other significant bit of new verbiage comes at the very end of the statement, where, for the first time, the Bank of Canada introduces household debt as a factor that could prompt an interest-rate increase. After stating that "some modest" removal of monetary stimulus likely will be required "over time," policy makers wrote, "the timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector."

As we all know, Statistics Canada revisions last week left the ratio of household debt to income north of 160 per cent, an alarming number. Mr. Carney has been warning Canadians to go easy on debt for a while now, reminding audiences that interest rates eventually will climb. But the central bank's official message on the matter was a little muddy. It was assumed the Bank of Canada's tilt toward raising interest rates was at least in part an effort to dissuade excessive borrowing.

But that message wasn't clear, prompting questions about whether the central bank actually would risk choking economic growth simply to curb household borrowing. Now we have certainty. The Bank of Canada said Tuesday that it anticipates that debt levels will climb a bit higher before "stabilizing" over the course of a couple of years. If that doesn't happen, there's a good chance the central bank will move to see that it does.

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