Bank of Canada singles out household debt as ‘biggest domestic risk’

The Bank of Canada thinks interest rates are fine where they are, at least for now. It announced today that it will hold the key rate at one per cent, where it’s been since September 2010, and didn’t discuss possible hikes. Those accustomed to the central bank’s penchant for dulling the news got the message: “the Bank is a bit less dovish,” reads a CIBC note, which predicts that “markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike.”

The bank, in fact, said it believes the Europeans will manage their public debt mess without bringing down the system, and that the Canadian economic outlook has “marginally improved,” in part because the U.S.  is doing a little better.

But another big reason to believe Mark Carney may be closer to a rate hike than previously thought, is the bank’s statement about Canadian wallets:

Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk. 

As Tamsin McMahon wrote a couple of weeks ago in Maclean’s, Canadians owe an average of $1.53 for every dollar they earn–just below where American debt stood when housemageddon hit south of the border. And there’s little question that record-low interest rate have encouraged Canadian borrowing, much as they did in the U.S. under Alan Greenspan, who is widely blamed for bringing America from the dot-com bust to the housing crisis. Up here, though, it’s hard to point the finger against Carney, whose hands are tied by a lucklustre global economy, the Fed’s decision to keep U.S. rates low through 2014, and rising commodity prices, which are already pushing up the loonie and hurting exports and the manufacturing sector.

Still, the bank sounded an upbeat note—and that may indicate that the rate hike the housing sector very much needs may be closer than we dared hope for.