* Macklem suggests outlook weaker than previously thought
* Says BoC may need to hike rates amid soaring personal debt
* Sees signs of moderation in housing, debt
* Macklem seen as strongest candidate for next BoC governor
By Randall Palmer
KINGSTON, Ontario, Jan 10 High household debt is
stretching the Bank of Canada's low interest rate strategy to
the limit, Senior Deputy Governor Tiff Macklem said on Thursday,
hinting that the central bank will retain its bias toward higher
Macklem, considered the strongest candidate to be the next
governor of the central bank after Mark Carney leaves later this
year, said keeping rates low for the longest period since the
early 1950s was the right thing to do during the global
financial crisis and in its aftermath.
"It was the right thing to do... That strategy is reaching
its limits and rising levels of household indebtedness have
created a vulnerability," he said in response to a question from
the audience following a speech at Queen's University in
Macklem said in his speech that the Canadian economy will
likely be more sluggish than expected in the near term but that
momentum will pick up throughout 2013.
"We continue to expect economic activity to pick up through
2013, but near-term momentum now appears to be slightly softer
than previously anticipated," Macklem said.
"These and other developments will all be taken into
consideration as we revise our economic projections, to be
published on Jan. 23 with the next interest rate decision," he
The bank is expected to keep its benchmark interest rate on
hold at 1.0 percent later this month. But it has been hinting
for months that its next move will be up, not down and the
debate in markets is just how soon it will act.
Market players surveyed by Reuters in late November forecast
the bank would raise rates in the fourth quarter of this year.
Yields on overnight index swaps, which trade based on
expectations for the policy rate, show traders do not fully
pricing in a rate hike this year.
In another hawkish sign, Macklem repeated comments by Bank
of Canada Governor Mark Carney that in the current
circumstances, the bank may want to set interest rates higher
than would normally be warranted to reach its 2 percent
inflation target within six to eight quarters.
He cited Canada's record high household debt as a factor
that could influence the timing and degree of any rate
"If the bank were to lean against such imbalances, we would
clearly say we are doing so, and indicate how much longer we
expect it would take for inflation to return to the 2 percent
target," he said, echoing previous remarks made by Mark Carney,
the bank's current chief.
Michael Gregory, senior economist at BMO Capital Markets,
believes the bank's Jan. 23 announcement will keep its language
on the need to raise interest rates.
"It will be retained even though the Bank's economic
projection will be downgraded ... and the output gap, currently
expected to close by the end of 2013, might be pushed into early
2014," he wrote in a note to clients.
Macklem's speech is being closely watched as he is widely
viewed as the most qualified candidate to take over as governor
after Carney leaves to be the next governor of the Bank of
Debt accumulation by Canadian consumers is slowing and if
the trend continues the ratio of household debt to income -
which hit a historic high of 163 percent in the third quarter of
last year - will stabilize later this year, he said.
Fears of an overheated housing market are also starting to
wane amid signs real estate activity is cooling. Macklem
predicted housing construction would moderate to come in line
with demographic demand at some point this year.
He warned though, that it was too early to tell if these
trends would last.
While he stressed the bank's commitment to keeping inflation
low and stable, Macklem also highlighted the need for
flexibility in the time it takes to reach the inflation target.
The global crisis taught us that price stability and financial
stability are linked, he said, and one should not be pursued
without keeping an eye on the other.
"It may be appropriate in some circumstances for monetary
policy to complement macroprudential policy and contribute to
financial stability directly.