Poloz: Canadian Household Debt an Economic “Vulnerability”

As the Bank of Canada plans its next moves regarding interest rate hikes, there is a lingering burden that’s worrying the central bank — the $2 trillion in household debt that Canadians have accumulated.

In a speech to the Yellowknife Chamber of Commerce, Bank of Canada Governor Stephen Poloz explained the “sheer size” of the debt means that associated risks will linger for some time.

However, Poloz showed optimism on the subject, saying that he feels the central bank can “manage these risks successfully.”

Of the $2 trillion in debt affecting Canadians, $1.5 trillion consists solely of mortgage debt. The Bank of Canada considers that debt a vulnerability for both the whole economy and for “highly indebted households who will face increased debt-service costs when interest rates rise.”

“We are closely watching the vulnerability represented by this group and the debt they carry, and how it poses a risk to both the financial system and the economy,” Poloz said.

Since last July, the central bank has raised interest rates three times, though it chose to keep rates steady at 1.25 percent last month. While the bank has been forthcoming about wanting to implement higher interest rates to contain inflation, it’s also been working to time increases appropriately.

“If we raise rates too quickly, we risk choking off growth and falling short of our inflation target. If we move too slowly, we risk a buildup of inflation pressures that would cause an overshoot of our inflation target,” Poloz explained.

Poloz also elaborated on other concerns that the bank is keeping its eye on when considering future hikes, such as new mortgage rules, the renegotiation of the North American Free Trade Agreement and a variety of competitiveness challenges affecting Canadian exporters.

While the bank’s next announcement is set for May 30, analysts seem to be divided about what Tuesday’s (May 1) speech entails moving forward.

“Governor Poloz’s remarks today offered something for everyone,” Royce Mendes, an economist at CIBC World Markets, said in a note obtained by Bloomberg. “Hawks will latch on to the comments suggesting that the current rate of interest is well below the economy’s neutral rate, and that the central bank has become more confident in the outlook.”

“But doves will focus on comments reiterating that high levels of household debt mean that rate hikes are more powerful this cycle, and that the bank needs to closely monitor the response to higher rates of some of the most vulnerable households in Canada,” Mendes said.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.