Bank of Canada sees limit to low interest-rate strategy

Thu Jan 10, 2013 6:04pm EST
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By Randall Palmer

KINGSTON, Ontario (Reuters) - High household debt is stretching the Bank of Canada's low interest rate strategy to the limit, Senior Deputy Governor Tiff Macklem said on Thursday, hinting that the central bank will retain its bias toward higher interest rates.

Macklem, considered the strongest candidate to be the next governor of the central bank after Mark Carney leaves later this year, said keeping rates low for the longest period since the early 1950s was the right thing to do during the global financial crisis and in its aftermath.

"It was the right thing to do... That strategy is reaching its limits and rising levels of household indebtedness have created a vulnerability," he said in response to a question from the audience following a speech at Queen's University in Kingston, Ontario.

Macklem said in his speech that the Canadian economy will likely be more sluggish than expected in the near term but that momentum will pick up throughout 2013.

"We continue to expect economic activity to pick up through 2013, but near-term momentum now appears to be slightly softer than previously anticipated," Macklem said.

"These and other developments will all be taken into consideration as we revise our economic projections, to be published on January 23 with the next interest rate decision," he added.

The bank is expected to keep its benchmark interest rate on hold at 1.0 percent later this month. But it has been hinting for months that its next move will be up, not down and the debate in markets is just how soon it will act.

Market players surveyed by Reuters in late November forecast the bank would raise rates in the fourth quarter of this year. <CA/POLL> Yields on overnight index swaps, which trade based on expectations for the policy rate, show traders do not fully pricing in a rate hike this year.   Continued...

Bank of Canada Senior Deputy Governor Tiff Macklem speaks during a banking event in Mumbai August 24, 2011. REUTERS/Danish Siddiqui