Poloz says Canadians owe $2 trillion as central bank mulls next rate hike

Bank of Canada governor Stephen Poloz says Canadians have amassed a $2-trillion mountain of household debt that is now casting a big shadow over the timing of his next interest rate hike.

In prepared remarks of a speech Tuesday in Yellowknife, Poloz said the pile has been growing for three decades in both absolute terms and when compared to the size of the economy — and about $1.5 trillion of it currently consists of mortgage debt.

The central bank has concerns about the ability of households to keep paying down their high levels of debt when interest rates continue their rise, as is widely expected over the coming months.

Poloz says the volume of what Canadians owe is an important vulnerability for individuals and the entire economy — and it’s one of the key reasons why the bank has been taking a cautious approach to raising its trend-setting rate.

However, he says there’s good reason to think Canada can manage the risks from debt, which he says is a natural consequence of several factors, including the combination of a strong demand for housing and the prolonged period of low interest rates maintained in recent years to stimulate the economy.

The central bank stuck with its benchmark rate of 1.25 per cent last month as it continued its careful process of determining the best juncture for its next hike.

Mixed opinions

Economists and market watchers seemed divided in their interpretation of Poloz’s words, with some calling its tone “hawkish” and others saying he took a balanced tone.

“In my opinion, the tone of his messaging leaves the door wide open for a hike on May 30th which is consistent with my earlier read,” said Scotiabank Economics’ Derek Holt in a commentary.

“That is still not a certainty by any means, as the next move remains contingent upon the flow of data on activity measures, inflation and wages alongside significant event risk over the coming weeks,” Holt said.

Conversely, Don Curren, strategist at Cambridge Global Payments, said Poloz’s remarek “don’t fundamentally alter the market’s expectation the [central bank] will proceed cautiously in draining away the monetary stimulus still supporting Canada’s economy.”

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