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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.
"We're identifying a potential risk to the economy but that's not our base-case scenario."
If required, the bank could withdraw some or all of extraordinary liquidity provided to the financial system through the term purchase and resale agreements.
Housing sales jumped 73 percent in October from a year earlier and prices rose 19 percent, extending a long string of unexpectedly strong data as Canadians took advantage of low mortgage rates.
Some analysts believe houses are overvalued and consumers are getting too far into debt, but so far policy-makers have been reluctant to say this is the result of anything other than pent-up demand.
Finance Minister Jim Flaherty said last week he saw no need to take action to slow the housing boom but stood ready to tighten mortgage lending rules if necessary.
In his comments on Wednesday, Carney put the onus on individuals to make sure they only take on debt they can still afford in "ordinary times", when the bank raises interest rates again, without elaborating on the timing of that.
Lenders, likewise, should carefully monitor their risk "and not take false comfort derived from mortgage insurance and past performance of household credit," he said.
His message to both was that the economy may be looking better after a deep recession, but the degree of economic uncertainty remains high.
When asked if he feared a second global credit crunch stemming from trouble in the U.S. commercial real estate market, he said that market was "a very difficult situation" but did not see it being a shock to the financial system.
Canada's economy is expected to grow faster than other G7 countries next year but the recovery will nonetheless be more protracted and more reliant on domestic demand than usual.
"Growth in our economy is going to pick up. That growth is going to be principally the result of strength domestically: consumption, housing, government," Carney said. (Additional reporting by Louise Egan in Ottawa; editing by Rob Wilson)