December 13, 2010
Okay, Canada. The Governor of our central bank would like a moment of our time to remind us that while interest rates have remained very low for quite some time, they will not last forever. So don’t depend on ’em for your financial planning.
According to the Financial Post:
“Cheap money is not a long-term growth strategy,” Mr. Carney said in an address to a Toronto luncheon. “Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
So what does that mean? If Canadians don’t recognize the risks associated with depending on low interest rates, the aftermath will be even worse. Basically, people can spend more now or later…but not both. So the more you ignore the fact that interest rates are going to rise now, the less you’ll be able to spend later.
But Canada’s been alright so far, so why is Carney worried? Well, StatCan released a report that concluded debt levels have hit a record-high level. The debt-to-disposable income ratio hit 148.1%– so Carney’s getting worried.
Here, Carney differs from many central bankers. Carney is of the opinion that central banks should not only focus on current price stability but, to be effective in long-term price index targeting, should also stave off possible asset bubbles before they happen. Basically, he wants to extend the mandate of the Bank of Canada beyond short-term inflation targeting. He wants to ensure stability in the markets too.
If the Bank of Canada sees trouble brewing in a certain market, regardless of the inflation rate, they might raise or lower interest rates accordingly. So if the housing market looks like it’s on a runaway price appreciation spree, then he’ll hike rates to discourage pressure on prices.
This sounds like a great plan to me. I’ve always been confused as to why central banks are only concerned with inflation (as far as monetary policy goes). I think they could have a far more active role in directing the economy as a whole.
But I’m getting slightly off topic here. Basically, don’t get spend happy and take out another Homeowner’s Line of Credit based on a projection that includes interest rates remaining at these levels. They won’t. Thank you– that is all.