Friday, July 18, 2014

With Household Debt Near Record Highs, BoC Mulls Major Interest Rate Policy Change

Bank of Canada governor Stephen Poloz says low interest rates may become the “new normal” as Canadians have taken on so much debt that any rate spike could send shockwaves through the economy.
The head of the central bank told CBC’s The Current on Thursday that his team is researching a “neutral interest rate” policy, which typically means that policymakers neither stimulate nor restrain economic growth.
Such a policy would mark a departure from how the bank has done things for the past several decades.
“The new normal, as we see it, is probably one in which the interest rate … is probably going to be lower than what we thought in the past,” he said on Thursday’s show.
“So much debt has been taken on during the course of this downturn that every uptick in interest rates that we get, whether it’s two years from now or what have you, is going to hit the cash flow of ordinary people bigger than in the past.”
The bank announced Wednesday it is keeping the overnight loan rate at one per cent, where it has been since September 2010, after raising it gradually from a low of 0.25 per cent in the wake of the 2008-2009 downturn.
The low rate environment has encouraged many Canadians to pack on debt while borrowing continues to be cheap. The country’s average debt-to-income ratio now hovers around 163 per cent, meaning Canadians owe an average of $1.63 for every dollar they earn.