Bank of Canada flags rising household debt

Bank of Canada governor Mark Carney. (File Photo)

Bank of Canada governor Mark Carney. (File Photo)

Mark Dunn, Senior National Reporter

, Last Updated: 3:50 PM ET

OTTAWA — Household debt will become a larger factor in determining monetary policy, the Bank of Canada said Tuesday after opting not to tinker with interest rates for the 25th consecutive month.

The bank announced it was maintaining its benchmark overnight rate at 1%, and predicted that household debt — a combination of mortgages and consumer credit — is expected to rise over the next year before stabilizing.

Last week, Statistics Canada upped the ante when it reported household debt was higher than thought - sitting at 163.4% of average income.

The concern for number crunchers is that the economy could take a hit if consumers put the brakes on spending to focus on debt.

That, combined with a drop in housing prices, could bruise consumer confidence if property owners are left sitting on mortgages worth more than their homes.

Carney will react Wednesday to the issue at a news conference.

The Royal Bank's Dawn Desjardins said it's prudent for the central bank to monitor debt loads when setting policy.

With recent changes to mortgage rules by the finance department to discourage some from entering the housing market and all the "noise" about sitting on too much debt, the bank's assistant chief economist said the message is being heard.

But not likely in a way consumers "are going to pull back (on spending) to such a significant extent that it destabilizes the economy," she said, adding that while debt is rising it's doing so at a slower rate.

And with a pretty strong labour force, accelerating wages, a sound financial system, low borrowing costs and the healthy balance sheets of Canadian businesses, Desjardins said the outlook is positive.

Even the Bank of Canada says despite the recession in Europe and other global negative indicators, the economy "is expected to pick up and return to full capacity by the end of 2013."

It forecasts growth of 2.2% this year, 2.3% next year and 2.4% in 2014.

The bank is also not expected to touch interest rates until well into next year.