Interest rates may not head higher until well into next year, but Mark Carney wants Canadians to understand that their economy is unique in that it is "in an expansion, not a recovery."
The Bank of Canada Governor laid out his plans for interest rates in the clearest possible terms Wednesday, saying he sees no "imminent" changes ahead, but that "over time, rates are more likely to go up than not."
Mr. Carney caught some observers by surprise Tuesday when the central bank, holding its benchmark overnight rate steady at 1 per cent, continued to signal that the next rate move will be an increase, though it's in no rush to do that at this point. They had expected he would drop that language from his statement.
Based on the central bank's latest musings, on everything from economic growth to consumer debt, it could be the second half of next year before Mr. Carney actually pulls the trigger, anywhere from mid-2013 to the end of the year. But pull it he will, as he indicated Wednesday in unusually clear terms.
It is "important" for the general public and investors to realize that Canada is pushing up against its non-inflationary production capacity, its economy is in an expansion phase, and elevated household debt levels represent a significant threat to the financial system, Mr. Carney said.
"We are in an expansion, not a recovery, which is unique in advanced economies," Mr. Carney told reporters in Ottawa as he released the central bank's latest quarterly economic outlook, which projects steady, if unspectacular, growth through 2014.
That pace is faster than that which policy makers believe the economy can sustain without stoking inflation. However, Canada's economy has expanded this year at a slower pace than the central bank was expecting, putting downward pressure on inflation and negating the need for higher interest rates immediately.
Every October, policy makers revise their estimate of how fast Canada's economy can grow without fanning inflation. The Bank of Canada said "potential growth" would be 2 per cent in 2012, 2.1 per cent in 2013, and 2.2 per cent in 2014, unchanged from a year ago. The central bank forecast the economy's non-inflationary rate of growth would be 2.1 per cent in 2015.
The central bank's estimate of the economy's speed limit explains why policy makers remain inclined to lift interest rates. They predict Canada's gross domestic product will grow at an annual rate of 1.8 per cent in the fourth quarter, and speed up to 2 per cent in the first quarter of 2013.
By the second half of next year, the Bank of Canada predicts the economy will be growing at a pace of 2.5 per cent, a forecast that will reinforce predictions that the central bank finally will boost borrowing toward the end of 2013.
Mr. Carney's comments came on the same day that the U.S. Federal Reserve Board renewed its commitment to keeping its key rate near zero at least through mid-2015.
Still fretting about high unemployment and sluggish growth, though noting a pickup in the housing industry from its "depressed level," the U.S. central bank also said it would keep pumping cash into the financial system through regular purchases of mortgage-backed securities and other efforts.
Mr. Carney also said the risk posed by household debt might be dissipating as the Bank of Canada's repeated warnings sink in.
Noting that consumer spending has been "moderate" of late, the central bank is cautiously suggesting Canada's credit binge could be ebbing.
"It is possible that the elevated level of household debt is beginning to induce a more cautious attitude among Canadian households," the Bank of Canada said in its third-quarter Monetary Policy Report.
The more sanguine take on the trajectory of household debt was the biggest surprise in the monetary policy report, a document that was largely previewed in Tuesday's policy statement, which the central bank used to harden its resolve to raise interest rates within the next couple of years.
For the better part of two years, Bank of Canada Governor Mark Carney and other officials have been warning Canadians to go easy on credit, reminding audiences that borrowing costs eventually will rise. As well as custodian of the economy, the central bank also sees itself as the guardian of financial stability, and a wave of personal bankruptcies and foreclosures could cripple the banking system.
Canadians have every incentive to borrow. Policy makers left the benchmark rate at the ultralow setting of 1 per cent for a 25th consecutive month on Tuesday. Banks appear willing to lend, especially government-backed mortgages, and higher commodity prices are boosting national wealth.
However, the ratio of household debt to income has climbed above 160 per cent, a level that the central bank considers a threat to the financial system. – and by extension, the biggest domestic risk facing the country's economic prospects. The central bank said for the first time Tuesday that household debt could prompt an interest-rate increase if Canadians fail to curb their appetites for credit on their own.
The Bank of Canada notes in its report that household credit growth has stabilized at a rate of around 5.5 per cent since the start of the year, a slower pace than the historical average of about 8 per cent.
A more cautious consumer comes at a price: Slower economic growth. The central bank sees little change in household spending over the rest of the year and into 2013. "despite the supportive impact of improved financial conditions and higher terms of trade in recent months." The central bank now expects consumption to grow "slightly" slower than incomes.
That will rob Canada of its primary source of economic propulsion since the recession, putting more pressure on businesses to boost investment. The central bank says it will be 2014 before exports return to prerecession levels, as global demand remains diminished because of a recession in Europe, tepid growth in the U.S. and weaker demand in China.