Bank of Canada sees households easing Europe pain

Wed Jan 18, 2012 12:38pm EST
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada said strong household spending will boost economic growth over the next two years, helping offset the impact of the European debt crisis, but warned that high household debt was a concern for policymakers.

With economic slack expected to be eliminated by the third quarter of next year, the central bank governor, Mark Carney, made it clear in a press conference that he was not about to raise interest rates solely to slow the hot housing market.

In the bank's quarterly Monetary Policy Report released earlier on Wednesday, the bank did say its economic projections assumed gradual interest rate increases through 2013.

"The projection includes a gradual reduction in monetary stimulus over the projection horizon, consistent with achieving the inflation target," it said in its quarterly Monetary Policy Report.

The central bank, which on Tuesday left its benchmark rate target unchanged at 1 percent - below the current inflation rate - said corporate balance sheets were "in their best shape in living memory," bringing good opportunities for investment.

That said, it repeated concerns about high levels of household debt, triggered in part by low borrowing costs.

"The biggest concern is taking extreme levels of debt for those who are most vulnerable and in an environment where the housing market has been quite robust for a period of time and is in some cases quite firmly valued, in other cased potentially overvalued," Carney said at a news conference.

"There should be some caution in our view on bringing on additional debt."   Continued...

<p>A cyclist passes the Bank of Canada building through a snow covered sidewalk in Ottawa January 17, 2012. REUTERS/Chris Wattie</p>