Bank of Canada Governor Mark Carney says he would hike interest rates if Canadians don't heed warnings about escalating household debt.
But Carney said that option would be a last resort if other measures, like tighter mortgage lending rules, don't discourage overspending by people seduced by record-low interest rates who can't afford it.
"The reason one does not want to lead with monetary policy in this situation is that it has consequences for the entire economy if we were to tighten only to address one aspect," he said Wednesday at a news conference.
He said there are signs these tools are working because that while debt levels - which sit at about 163% of average income - are rising, they have slowed.
"The accumulative effect of those measures has not fully been felt."
Carney said his preferred option is to keep hammering away at the message that Canadians would be better prepared to weather an economic downturn without a mountain of debt hanging above them.
Canadians sit on $1.6 trillion of debt which includes mortgages, credit cards and lines of credit.
"The first line of defence is communication around the issue. Monetary policy can play a complimentary role. It's not the first mover in any of this," Carney said.
Like others, Carney is monitoring whether debt loads cause consumers to tighten their belts and the impact less spending could have on the economy, which is forecast to grow by 2.2% this year, 2.3% next year and 2.4% in 2014.
He maintained the benchmark overnight rate at 1% for the 25th consecutive month to encourage business investment and borrowing "for those households who can afford to borrow" during a global economic downturn.