Bank of Canada Governor Mark Carney says that if the central bank opts to raise interest rates to deter households from taking on more debt, he would "clearly declare" what the central bank is doing.
"If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the 2 per cent target," Mr. Carney said in prepared remarks for an audience in Nanaimo, B.C.
The pledge is significant because Bay Street investors and economists are at odds over the Bank of Canada's forward guidance on borrowing rates. The central bank has held its benchmark rate at an ultra-low 1 per cent for two years, reflecting tepid economic growth at home and abroad.
Yet for several months, policy makers have indicated that they would like to raise interest rates at the earliest possible moment.
Tiff Macklem, the No. 2 at the Bank of Canada, reiterated that stance earlier this month, isolating Canada's central bank as one of the few in the world that is leaning toward higher interest rates. At the same time, revised Statistics Canada figures released Monday show Canadians' debt-to-income ratio reached 163.4 per cent in the second quarter, a heavier burden than U.S. households carried ahead of the housing crash.
Mr. Carney's comment on the conduct of policy comes as he and his deputies gather this week to reassess interest rates and complete the central bank's third-quarter report on the economy.
The Bank of Canada's next interest rate announcement is scheduled for a week from Tuesday; it is set to release its latest Monetary Policy Report the next day. Mr. Carney said the central bank's revised economic forecasts will take into account the impact of a pervasive sense of uncertainty, which the central bank chief said has paralyzed economic actors around the globe.
"We must take care not to allow uncertainty to dominate our actions, letting profitable opportunities slip away and, more generally, compounding the very real, but still manageable, challenges facing the global economy," Mr. Carney said.
Mr. Carney urged European policy makers to act quickly and decisively to diminish uncertainty by setting in place a realistic three- to five-year plan for reforming the euro zone, including creating a banking union and closer fiscal union.
And U.S. politicians must act to avoid the fiscal cliff in 2013, when trillions of dollars in tax increases and automatic spending cuts would automatically be triggered if policy makers don't reach a settlement. Without action, the U.S. economy would take a hit amounting to roughly 4 per cent of gross domestic product, Mr. Carney said.
"If authorities do not change these provisions, this massive fiscal drag will likely push the U.S. economy back into recession next year," he warned. "That is not what we expect, but like others, we cannot be sure."
With files from The Canadian Press