MNI INTERVIEW2: BOC Rate Path Tied To Savings, Debt -Ex Deputy

The extent of eventual interest rate rises by the Bank of Canada may rest upon the response to tightening of an economy with both unprecedented levels of private and public debt and record savings built up through Covid relief checks, former Deputy Governor John Murray told MNI.

“A lot of that money is still being saved, and depending how you look at it could help sustain inflation and price pressures going forward, or just provide kind of a slow leak if it isn't spent quickly,” Murray said. There’s also evidence that Canadians are spending this money slower than Americans, he said.

Another factor is indebtedness.

“It's very hard to know how sensitive the economy is to interest rate moves now, and part of that is a reflection of the high debt levels, which could have increased that sensitivity. So gauging how to withdraw stimulus from the monetary policy side, it could be a delicate thing,” he said.

Governor Tiff Macklem has signaled he’s aware of the two-sided risks and the need to be nimble, Murray said. The Bank's last economic projection listed stronger household spending as an upside risk, alongside the downside risk of a setback in global financial conditions.

Canada has among the world's most overstretched housing markets by some measures and consumer debt long ago grew to more than 100% of GDP. The era of low-for-long rates also means a generation of Canadians has never seen anything but historically cheap mortgage rates.

HIGH LEVELS OF INDEBTEDNESS

“Once you had more faith in the recovery even then you'd be very wary about withdrawing the stimulus too quickly on the monetary policy side, because of what the higher interest rates might do,” Murray said.

Fiscal stimulus has also been greater than the Bank may have expected and even the budget early this month was "quite generous," he said. “That creates extra pressure for the Bank of Canada of course, but again, this uncertainty over how Canadian households are going to respond in terms of their savings behavior.”

Households aren't alone in borrowing through the pandemic, with the federal debt breaking CAD1 trillion and no plan to balance the books.

“Certainly Canada has a high level of government and private sector indebtedness, which meant when you reached the point where you might start to suspect inflationary pressures would build, you'd be very cautious about doing anything too dramatic by way of tightening for fear of triggering financial instability,” Murray said.

Household debt as % of disposable income:

Source: Statistics Canada