May 8, 2012 / 7:43 PM / in 6 years

Canada watchdog: low rates could lead to more debt

OTTAWA (Reuters) - Continued low interest rates in Canada could prompt households to take on even more debt at a time when the economy is less resilient to external shocks, the country’s banking watchdog said in a report on Tuesday.

The Office of the Superintendent of Financial Institutions (OSFI) included the warning in a report on its plans and priorities, which contains a discussion of key risks to the stability of the financial system.

“Elevated household debt levels not only make households vulnerable to adverse shocks but continued low interest rates could encourage even higher household indebtedness for a period of time,” the report said.

The Bank of Canada has held its key interest rate unchanged since September 2010 at 1 percent and has signaled it may need to raise rates, without giving guidance on the timing of such a move.

OSFI also suggested that pulling back aggressively on spending could be bad news for the economy, described as “less robust and less resilient to adverse shocks compared to the last recession.”

“Consumers themselves could become a source of negative domestic influence if they take action to rein in spending to address their indebtedness.”

The report said OSFI and Canadian banks may need to devote more resources in the year ahead to strengthening financial regulation and monitoring their implementation and impact on banking behavior.

The regulator also plans to turn its attention to insurance companies, which will include new capital requirements, enhanced supervision and disclosure requirements.

Reporting by Louise Egan; Editing by Jeffrey Hodgson

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