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Be careful, low rates won't last, says top banker

October 23, 2009
Les Whittington
Toronto Star

OTTAWA–Bank of Canada Governor Mark Carney is warning homebuyers against taking on too much debt because today's low interest rates will not last forever.

"People should manage their affairs prudently in anticipation that, at some point, rates will return to a more normal level," Carney said after releasing his quarterly economic review.

"Obviously, rates are exceptionally low," he said, noting that the central bank has used its interest-rate-setting influence to drive down consumer borrowing costs to record lows to help stimulate economic activity.

At the same time, Carney said, the bank has "given pretty clear guidance on how long we expect they (interest rates) will have to remain at these levels. People should manage their affairs for a longer horizon." He reaffirmed his promise that, barring an outburst of runaway inflation, the bank will keep its trend-setting overnight rate at 0.25 per cent until next summer. Assuming the economy is recovering by mid-2010, the bank is expected to begin raising rates.

The bank now estimates that Canada's economy will shrink by 2.4 per cent this year before rebounding with 3 per cent growth in 2010 and 3.3 per cent in 2011.

Carney said the housing market is showing strength and he has "some concern" that low rates and increasing demand by homebuyers could create an artificial price bubble of the kind that plunged the United States into a severe recession when it burst in 2007.

But the debt burden in Canada has not reached the alarming levels faced by U.S. consumers before the recession, he said.

"Canadian consumer balance sheets are starting from a much stronger position than U.S. consumer balance sheets" were in ahead of the economic downturn, Carney told reporters.

The quarterly review indicated the economy is on the mend but the recovery is being slowed by the unexpectedly strong value of the loonie on exchange markets.

Carney, who said Canada's currency is being driven by investors bailing out of the U.S. dollar, kept up what appears to be an effort to throw speculators off balance.

"Intervention is always an option," he added.

"Markets should take seriously our determination to set policy to achieve the (2 per cent) inflation target. Markets sometimes lose their focus. We don't lose our focus."

The bank governor did not give specifics on how it might take the unusual and risky step of intervening.

On Tuesday, by repeating his pledge not to raise interest rates until next summer, Carney seemed to have succeeded in catching markets off guard, with the loonie dropping nearly two cents against the greenback.

CIBC World Markets economist Avery Shenfeld said Carney seems to be engaged in talking down the value of the loonie. "By dampening expectations for early interest rate hikes, he's taken a little bit of a shine off the Canadian dollar."

On Thursday, the dollar shed 0.16 of a cent (U.S.), closing at 95.44 cents.

The bank said the loonie has established itself on exchange markets at about 96 cents, much higher than the 87 cents forecast by Carney a few months ago.

If investors keep shying away from the U.S. dollar, a rising Canadian dollar could "act as a drag on growth" in Canada, he said, especially if consumer and business demand takes longer to rebound globally.

Posted on Thursday, October 29, 2009 at 03:07AM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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