Tighter mortgage rules might be 'insufficient' to curb household debt

BoC Deputy Governor Timothy Lane spoke at Harvard

Targeted rules are often a better way to deal with a buildup of risk in the economy than monetary policy, BoC Deputy Governor Timothy Lane said in his prepared remarks for a speech he gave today at Harvard University. So, for example, if households have gone on a borrowing binge and house prices are inflated, you’d be better off tightening mortgage regulations than raising interest rates. Tougher mortgage rules target the housing market specifically; an interest rate hike would also hit exporters by causing your home currency to appreciate—unless other countries rein in their monetary policy as well (which ain’t happening any time soon in the real world).

This is a well-known policy stance of the BoC. Governor Mark Carney just told all this once again to British MPs last week: Canada is better off curing its household debt problem with a healthy dose of mortgage-rule tightening rather than an rate raise, which would come with serious side effects.

And yet, if the more sophisticated, light-touch treatment doesn’t do the trick, the BoC might have to use its rougher, heavier medicine, Lane told his distinguished Harvard audience today:

If such targeted prudential measures turned out to be insufficient, monetary policy could also be used, within a flexible inflation-targeting framework, as a complementary instrument to address financial imbalances.

Canadians have slowed down the pace at which they’re taking on new debt and there’s plenty of evidence the residential real estate market is cooling. But, Lane noted, that could still turn out to be a temporary improvement:

“it is possible … that household spending could regain momentum”

After all, if interest rates stay at rock bottom, borrowing will stay cheap.