UPDATE 2-Bank of Canada says credit growth slowing, risks remain

Mon Feb 11, 2013 5:46pm EST
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* Deputy governor Lane says high debt still a big risk to financial system

* Monetary policy could be deployed if other measures insufficient

* Lane warns against risky investments as rates stay low for long time

OTTAWA, Feb 11 (Reuters) - Canadians have taken on debt at a slower pace recently, but record-high personal debt remains a risk to the financial system and if the problem persists the central bank could hike interest rates, a senior Bank of Canada official said on Monday.

The central bank has described the heated housing market and indebted consumers as the biggest domestic threat to the Canadian economy, although there have been signs of cooling. Last month Moody's Investors Services cut the ratings of six Canadian banks due to these concerns.

"The growth of household credit has shown signs of moderating in recent months," Bank of Canada Deputy Governor Timothy Lane said in the prepared text of a speech he gave at Harvard University in Cambridge, Massachusetts.

"The momentum in house price growth, sales of existing homes, and new construction has also moderated. Nonetheless, financial system risks associated with household imbalances remain elevated."

Lane warned household spending could still regain momentum or, conversely, there could be a sudden weakening.

The government has intervened four times in the mortgage market to discourage excessive borrowing and the banking regulator has also pressed banks to adopt stricter mortgage lending practices.   Continued...