The Bank of Canada warned Monday it is keeping a close watch on household debt, and repeated its plea for both individuals and lenders to act responsibly when it comes to loans.
In her maiden speech as a deputy governor of Canada’s central bank, Agathe Cote told a business luncheon in Kingston, Ont., that restraining household debt is a key to the economic recovery.
“Sound household finances are a key element of a balanced economy,” Cote said in speech notes released in Ottawa.
“They are essential to keep household spending and overall economic growth on a sustainable track and to maintain the stability of our financial system.”
The fear is that if a shock occurs or interest rates rise, Canadians saddled with high debt payments will need to curtail spending on other areas.
That’s a problem for the economy, since about 60% of aggregate demand comes from household spending.
Cote concedes that low interest rates–in part because of Bank of Canada policy–are a principle contributing factor to why Canadians have been piling on debt at record levels even in uncertain economic times.
But she says the central bank’s primary responsibility is to keep inflation on target–not to address economic bubbles–although she hinted it is possible that could change in the future.
She made clear the main line of defence against excessive borrowing should be Canadians themselves and those that lend them money–the banks.
Failing that, the federal government can intervene by tightening up rules for borrowing, as it has twice in the past two years.
The central bank has been warning about excessive borrowing by Canadians for at least the better part of a year, but with little effect. In fact, the situation has gotten worse.
According to data released in the fall, household debt to disposable income rose to a record 148% in the third quarter of last year, even higher than what exists in the U.S.
