Bank of Canada Governor Mark Carney is getting more worried about record levels of household debt, but until the global recovery is on more solid footing, he'll be relying on others to deal with the issue.
It's Mr. Carney's dilemma. Low interest rates have underpinned a worrisome surge of debt, but the economy is too weak to justify higher rates any time soon.
The central bank leader left his key interest rate at 1 per cent Tuesday for an 11th consecutive meeting, marking policy makers' longest pause since the mid-1990s, as he and his team watch nervously to see how risks linked to the European debt crisis unfold.
Mr. Carney has repeatedly warned that low borrowing costs are enticing too many Canadians to take on debt that won't be affordable once interest rates rise. On Tuesday he upped the ante.
Mr. Carney took the unprecedented step of noting in an interest rate decision that he expects the debt-to-income ratio will keep rising. Moreover, he attributed this to "very favourable financing conditions" – i.e. the Bank of Canada's low policy rate, and its influence on the cost of mortgages.
"When they add something that wasn't there before," said Michael Gregory, a senior economist with BMO Nesbitt Burns, "it's a signal that something has moved on their radar screen."
Mr. Carney appears increasingly uncomfortable with a byproduct of his low-rate policy, even as debt-fuelled spending holds up the housing market and the economy at a time when soft global demand is crimping exports.
The debt-to-income ratio rose to a record 153 per cent in the third quarter, according to Statistics Canada, and exceeds the current level in the U.S. and the U.K. Canada is inching closer to the 160-plus threshold that got the U.S. and the U.K. into so much trouble four years ago.
Risks tied to the slack global economy are already affecting business decisions in Canada and arguably contributing to the slowdown in the labour market. For that reason, economists say it's unlikely Mr. Carney will raise interest rates until next year.
Mr. Carney has stressed that there may be cases where interest rate changes can buttress moves by regulators to tame asset bubbles or dangerous buildups of debt that could threaten the entire economy. But higher rates now would hurt manufacturers in Central Canada and deter business investment, and tightening while the U.S. Federal Reserve is debating whether it needs to ease more would boost the currency, adding to exporters' woes.
"The challenge of monetary policy is that it's a blunt instrument," said Derek Burleton, deputy chief economist with Toronto-Dominion Bank. "Regulation tends to have the benefits of surgical precision."
Mr. Carney is no doubt keenly aware of the U.S. Federal Reserve's failure to grasp the seriousness of trouble that was brewing in the U.S. housing market in the past decade, and criticism that Alan Greenspan fuelled that debacle by keeping interest rates low for longer than he should have.
But Mr. Greenspan was not presiding over an export-dependent economy that, according to new projections Mr. Carney released Tuesday, will grow just 2 per cent this year and 2.8 per cent in 2013, and that's assuming the European situation is stabilized.
"Standing pat seems appropriate," Mr. Gregory said. "But if things nudge either way – Europe clarifies itself a bit sooner, or housing takes off – the case for rate hikes will come a lot closer."
In the meantime, is appears homeowners can't resist the allure of rock-bottom mortgage rates.
"In my marketplace I see the consumer confidence to be very high, and it's high because interest rates have been kept low," said Peter Majthenyi, a Toronto-based mortgage broker. "Since the holidays, my phone hasn't stopped ringing."