Bank of Canada urges caution on household debt

Wed Dec 16, 2009 4:08pm EST
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By Ka Yan Ng

TORONTO (Reuters) - Rising household debt poses a risk to the Canadian economy, the central bank chief said on Wednesday, but he downplayed talk of a housing bubble fueled in part by a prolonged period of record low interest rates.

In a speech addressing concerns of an overheated housing market, Bank of Canada Governor Mark Carney repeated that household debt has risen sharply relative to income but said the risks to the financial system are small and do not warrant an early interest rate hike by the bank.

"At present, the risks arising from the Canadian household sector are relatively low. Indeed, by some measures, Canadian household finances appear quite healthy," Carney said.

Still, he said the bank is concerned enough about the issue to dedicate an entire speech to it and alert regulators and other authorities. It will monitor the credit profile of households and together with the government and regulators "take appropriate actions" if necessary.

The bank has pledged to hold its key interest rate unchanged at 0.25 percent until the end of June, unless inflation gets off track.

Carney said on Wednesday he still sees that rate as appropriate and reminded markets that the bank is not in the business of reacting to specific asset prices, such as housing, but is solely focused on its inflation target of 2 percent.

He said the bank was not surprised to see some heat in residential real estate market but it expects that to cool somewhat next year.

"We see strength in the housing market, that's what we projected. We're seeing some of that strength coming through. There has been a slower response on the housing start side. We expect to see that pick up in 2010 and that will have an impact on the housing market supply and demand dynamics," he said.   Continued...