The Bank of Canada’s focus on transparency and credibility—and its ability to effectively communicate its actions—has helped drive the responsible financial habits of Canadians, said bank governor Mark Carney in a speech given Dec.11.
While low borrowing rates, in effect for the past few years, have helped to spur spending and driven up Canadians’ household debt levels, Carney said current signs of cooling in the housing market suggest that consumers are paying attention to the bank’s recent indications that a rate hike may be on the horizon.
“Our guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing,” he said in his speech, the first given since it was announced he would take over as governor of the Bank of England next summer.
“Because the consequences of financial excesses may be felt over a longer horizon than other economic disturbances, the potential may exist for tension between price and financial stability considerations over the typical monetary policy horizon. In current circumstances, the bank may want to set interest rates higher than would otherwise be warranted to bring inflation back to target within the typical six- to eight-quarter time frame,” Carney said, referencing the bank’s aim of maintaining inflation around a 2% target.
Carney noted that—given this guidance from the bank—the percentage of fixed rate mortgages has nearly doubled this year, to about 90%, suggesting that homeowners are choosing to lock in today’s low mortgage rates in order to ensure they can budget living costs more accurately against other financial needs, such as building savings levels.
A rate increase would be welcome news for many Canadian DB pension plans, which have struggled in the current environment. According to data released this fall by Mercer, the average funded status of Canadian DB plans—already low at 87% to end 2011—had fallen an additional 4% by October of this year.
The bank has maintained its key interest rate at 1% since September 2010. Updates given in 2012 have indicated that the next rate shift will likely be upward—though no indication has been offered as to when that hike could come, and Carney noted that such specifics would be offered only in exceptional economic circumstances. The bank maintained its current rate during its most recent update, on December 4. The next opportunity for a potential increase is scheduled for January 23.