Carney: Household debt, if untamed, could warrant higher interest rates sooner

Plus: His comments on government debt and the safety of Canadian bank deposits

(Chris Wattie/Reuters)

Bank of Canada Governor Mark Carney is in Washington D.C. today, where he found the time for a televised chat with reporters hosted by Reuters. Here are some of the most interesting bits:

Expect a rate hike if Canada’s household debt can’t be tamed otherwise. Also, the housing market slump will ideally last two years:

The governor said appeared satisfied with developments in the household sector: consumer debt has slowed “quite nicely.” However, he added, the BoC might hike up interest rates “sooner” if the issue of Canadians’ overstretched wallets isn’t addressed “in a timely way.”

Carney also noted that the housing market, the major driver of Canada’s household debt spree, is “moving in the right direction,” with prices “adjusting” and the pace of new residential construction slowing. The real estate and consumer debt cool-down, he added, is “an adjustment that best takes place over a couple of years.”

Cyprus and the safety of Canadian bank deposits:

The governor aptly side-stepped a question about whether the eurozone should have demanded that some Cyrprus bank deposits be used to recapitalize the country’s troubled banks, leaving it simply at: “Well, it’s done.” Pressed on about whether Canadian bank deposits could ever be used to bail out a failing financing institution, he noted cryptically that the government has promised not to touch individual deposits. However, he stopped short of guaranteeing that uninsured deposits, those above $100,000, would be safe in an emergency.

Though he offered no words of endorsement for the recent Cyprus rescue, Carney did say that finding ways to “bail-in” financial institutions teetering on the verge of the abyss without asking taxpayers to foot the bill is “absolutely a necessary element” of current financial reforms. Regulators and big banks are working diligently to ramp-up capital buffers and ensure that the biggest financial players have enough rainy-day funds.

Too much government debt is bad, but don’t fixate on a specific debt-to-GDP ratio:

What did the governor think, the host asked, of the spreadsheet error that recently poked holes in Harvard economists Carmen Reinhart and Kenneth Rogoff’s widely cited idea that government debt above 90 per cent of GDP stifles growth? The governor didn’t seem to think too much of it. “I haven’t audited the now famous spreadsheet,” he quipped, “but others have, apparently. I think what’s important is to recognize … the depths of the insights by Reinhart and Rogoff’s work, which capture a number of dynamics that have come to pass for countries coming out of major crisis.” The BoC used the economists’ work as a “sanity check” on its own forecast, but did not consider the specific 90 per cent debt-to-GDP benchmark ratio relevant (Canada’s federal debt stands at 86 per cent). Obviously the government believes there’s a limit beyond which government debt become nefarious, but he added: “I won’t get pinned down on the exact limit.”