Bank of Canada chief warns again on debt levels

Sun Jan 23, 2011 11:23am EST
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By Jeffrey Hodgson

TORONTO (Reuters) - Bank of Canada Governor Mark Carney warned again on Sunday that Canadians should take steps to deal with high levels of household debt because interest rates would at some point rise from near-historic lows.

"Canadians could overextend themselves and they could get into a position where the debts that are sustainable at very low interest rates prove unsustainable when rates return to a more normal level," he said in a transcript of an interview with CTV's "Question Period."

"Don't take the current situation and extrapolate it, extend it out to the future. At some point, interest rates are going to move higher, they're going to go back to more normal levels. Can you service the debts you're taking on today at that point?"

Low interest rates have encouraged Canadians to take on debt at a level at that has alarmed some policymakers. Recent data from Statistics Canada showed household debt has risen to a record 148 percent of disposable income.

The central bank held its key interest rate steady on Tuesday and signaled it may keep rates on hold for longer than markets had expected even though it nudged its economic growth forecasts higher.

The Bank of Canada last year became the first central bank among the Group of Seven advanced economies to start raising interest rates since the financial crisis hit. It hiked its key policy rate three times, but left it at 1 percent as fresh strains emerged domestically and abroad.

Carney said the central bank was keep a close eye on Europe's sovereign debt problems, warning it posed a risk to Canada.

"We wouldn't be immune if the European situation were to take a real turn to the worse," he said.

"There are some severe problems there. The good news is that European officials at the highest levels are grappling with them ... we expect to see this situation resolved. But it has not yet been resolved and it would be some time yet before it is."

(Editing by Eric Walsh)

<p>Bank of Canada Governor Mark Carney speaks during a news conference upon the release of the Monetary Policy Report in Ottawa January 19, 2011 REUTERS/Chris Wattie</p>