The Bank of Canada has been escalating a war of words over Canadians' household debt to some time now. On Tuesday, it fired a serious shot across the bow.
In the statement accompanying the central bank's scheduled monetary policy decision (to no one's surprise, it left its key policy rate unchanged at 1 per cent), the bank made a conspicuous change to its language from previous statements regarding the factors that will influence when it decides to start raising rates:
"Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. 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. " (Our italics.)
That last part is new. While any change to the statement is generally meaningful – the central bank typically uses the previous rate-setting statement as a template for each new one, with only minor tweaks – this addition stands out as a significant departure for the bank.
Officially, the Bank of Canada's policy on interest rates is anchored in inflation; its rate policy is specifically tied to keeping consumer price index (CPI) inflation in a band of 1 to 3 per cent, with the midpoint (2 per cent) as a more specific target.
But now, the central bank is dropping a massive hint that it would consider raising rates to combat against runaway household debts, which it sees as a major threat to Canada's economic stability – the kind of bubble that causes long-term pain if it's allowed to swell to the bursting point. In another point in Tuesday's statement, the bank warned that it expects the household debt burden to get worse before it gets better.
It's unlikely the Bank of Canada would ever use household debt levels as its key determinant to the timing of rate increases; that's simply not consistent with the central bank's stated mandate, which is focused explicitly on price stability. (And, indeed, the bank indicates that total CPI inflation now isn't expected to return to the 2 per cent target until the end of 2013, "somewhat later than previously anticipated.")
However, the shift in language suggests that when it considers rate hikes, the bank's concerns about household debt loads will surely be weighed in – so much so that they will tip the scales in favour of hikes when the time comes. That means that despite what the bank acknowledged as a sluggish economic picture and a Canadian economy that won't return to full capacity for more than another year (later than the bank had projected in early September), rate hikes are still on the table for Canada – and probably sooner than inflation and capacity pressures would normally dictate.