Deal quickly with your debt: Mark Carney’s serious now

Carney sets the stage It’s clearly time to start listening to Mark Carney when he talks about getting consumer debt under control.

The Bank of Canada governor and his colleagues today laid the groundwork for that inevitable hike in interest rates, holding steady on their benchmark rate but signalling it’s going to change, The Globe and Mail’s Jeremy Torobin reports.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2-per-cent inflation target over the medium term,” the central bank said as it held its overnight rate at 1 per cent.

“The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

That’s the key, of course. The Canadian economy is looking up – indeed, the Bank of Canada forecast growth of 2.4 per cent both this year and next – but the euro crisis still haunts markets and the U.S. economy remains on uncertain footing.

“Overall, economic momentum in Canada is slightly firmer than the bank had expected in January,” it said, its statement sparking a surge in the Canadian dollar (CAC/USD-I).

“The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business and household confidence are improving faster than forecast in January … The degree of economic slack has been somewhat smaller than the bank had anticipated in January, and the economy is now expected to return to full capacity in the first half of 2013.”

Yet again, though, as he has for months now, Mr. Carney warned on consumer debt. That debt burden has been at record levels, and economists expect it to rise even more.

Toronto-Dominion Bank economist Craig Alexander, for example, said in a recent forecast that he believes the debt-to-income ratio among Canadians could climb to about 160 per cent, the level that caused such trouble for the U.S. and Britain.

“Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk,” the central bank said.

Mr. Carney is “clearly uncomfortable” with rates below inflation as consumer debt pushes ever higher and the economy heads toward capacity, said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

The timing of rate hikes is left an open question, but some are betting we’ll see them this year. Contrast that to the Federal Reserve’s expectation to hold steady until late 2014.

“The bank seems to be thinking about a small string of rate hikes at some point late this year, saying that some ‘modest’ reduction in stimulus ‘may’ become appropriate, but there’s enough doubt in that forecast that it also says that the timing and magnitude of tightening will be ‘weighed carefully,'” said chief economist Avery Shenfeld of CIBC World Markets.

Michael Babad

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