“Some have asked if increasing interest rates poses such a threat to households, why raise them? Yet others have asked if household debt is such a concern, why not raise rates and discourage borrowing?…In setting interest rates to achieve the inflation target, developments in household finances need to be weighed along with all the other factors influencing economic activity and inflation.”
Bank of Canada: "Puh-LEAZE don’t overspend Canada"
January 10, 2011
There was a lot of chatter throughout the summer when the Governor of the Bank of Canada, Mark Carney, began a rate-hike crusade. But that crusade ended quickly as uncertainty regarding the US situation set in.
There’s something unusual about interest rates remaining low. Normally, the Bank of Canada keeps interest rates low to encourage households to spend in economic downturns. In this case, households are already strung out on debt. In fact, the debt-to-disposable income ratio is at 148%. That’s high.
So what’s the point in keeping interest rates low? It’s still to encourage the economy– it’s just not necessarily to encourage people to buy homes they can’t afford after rates increase. So the Bank of Canada is urging everyone to tighten their belts (because apparently they don’t have the policy balls to do it themselves). Maybe that’s a bit unfair.
The Bank of Canada’s hands are tied. They could raise interest rates, but then they might not hit their inflation target (which is 2%). Oh, and for those of you who aren’t monetary policy buffs that’s really the only thing that the Bank of Canada cares about– the target inflation rate.
Anyway, the point that households had to curb spending was emphasized by the new Bank of Canada deputy governor, Agathe Côté.
She was quoted in the Financial Post:
Basically, we’re not raising rates because we act as a horse with blinders on– and the target inflation rate is the race track. Nevermind the fact that the entire world economic system collapsed because of an assymetrical relationship between household debt and income– our focus is on inflation. I’m not saying they’re doing anything wrong within the confines of their mandate– I’m saying someone needs to look at their mandate again because the Bank of Canada is the only arms length institution we’ve got to oversee the economy. Do we really want them looking at only one metric??