Bank of Canada talks of rate hikes, frets on debt

Tue Apr 24, 2012 6:09pm EDT
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By David Ljunggren

OTTAWA (Reuters) - Bank of Canada Governor Mark Carney repeated on Tuesday that the central bank might have to increase interest rates and he continued to fret about the high levels of debt that Canadians are taking on.

Carney used an appearance at the House of Commons finance committee to stress the central bank's recent message that rates could have to go up despite global economic uncertainty.

"We have noted that given the state of the (Canadian) economy, the amount of slack, firmer underlying inflation, that it may become appropriate to withdraw some of the considerable monetary policy stimulus," Carney told the committee.

"But any such decision would be taken with care and careful consideration of domestic and global risks. There's a few clear messages there."

The central bank, which has kept rates at a near-record low of 1 percent since September 2010, surprised markets last week when it explicitly mentioned that a rate increase might be needed because of a stronger economy and underlying inflationary pressures.

The cheap money has encouraged Canadians to borrow more heavily, particularly against the equity in their homes, prompting repeated alerts from the bank about possible calamitous consequences once rates start to rise.

Carney - who says Canadians cannot keep borrowing so heavily against the value of their homes - said financial authorities were looking closely at levels of household debt and ways to contain the problem. He also made it clear that too tight a clampdown could hurt economic growth.

"There's always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy," he said.   Continued...

Bank of Canada Governor Mark Carney arrives at the G20 meeting during the spring International Monetary Fund (IMF)-World Bank meetings in Washington April 20, 2012. REUTERS/Yuri Gripas