"We currently don't see a problem with the level of
household debt from an economy-wide perspective, nor does it
appear likely to become a problem," said Sheryl Kennedy, a
deputy governor with the central bank.
She said Canadians should be able to continue to make their
debt payments under current circumstances as long as they are
employed, and that prospects for job growth and for economic
conditions remain favorable.
The central bank's Monetary Policy Report Update last month
forecast growth in the neighborhood of 3 percent over the next
two years, Kennedy noted.
"That's a solid growth that should continue to support
income and employment. The underlying fundamentals are very
positive," she said, addressing the Probus Society of Kanata,
Ontario.
At first glance, household debt figures may seem shocking.
In the 35 years from 1969, total Canadian household debt rose
by almost 3,500 percent from C$24 billion ($19 billion) to
C$855 billion in 2004.
Household debt rose to 120 percent of disposable income in
2004 from just 70 percent in 1985.
But because of low interest rates, the percentage of income
required to make interest payments has fallen to just above 7
percent from 12 percent in 1990.
It is that debt-service ratio that the Bank of Canada is
focusing on most closely. Kennedy said that even if the bank's
key overnight lending rate were to rise to between 4 and 6
percent from the current 2-1/2 percent, the ratio would only
rise to 9 to 11 percent, which is below previous peaks.
That remark might give a peek into bank thinking on
interest rates since Kennedy said rates of 4 to 6 percent in
the past have been roughly consistent with its targeted 2
percent inflation rate.
In its Monetary Policy Report Update on Jan. 27, the
central bank said interest rates still need to rise to avoid
inflation bottlenecks toward the end of 2006. But it said the
higher Canadian dollar was forcing a slower pace of hikes.
"As we go forward, Canadians will, at some point, have to
adjust to paying somewhat higher interest rates on loans and
mortgages," Kennedy said. "But this scenario should not cause
serious difficulty as the majority of mortgages have fixed
rates, which should give homeowners time to adjust."
Kennedy said that as mortgage rates rise, the rate of
increase in house prices should slow down or level off.
"The bottom line is that we expect the financial situation
of the vast majority of Canadian households to remain
manageable," she said.
