Posted By Peggy Hill on December 14th, 2010
Courtesy of the Newsroom at the Propertywire.ca:
The Bank of Canada has issued a stern warning for those carrying high household debt; there is trouble waiting down the road in the form of looming high interest rates.
Canadians have enjoyed a low-interest rate environment for a while, and many haven taken advantage of low interest rate to acquire more debt, and the associated ease of securing financing
The Bank of Canada have voiced some very realistic concerns, understanding that cyclical and structural factors have led to low-interest-rate environment that currently exists, and there are possible significant impact on financial stability and economic growth in Canada and globally, if a variable in that environment changes- namely interest rates- which are expected to rise at some point in the near future.
“The crisis is not over, but has merely entered a new phase,” Governor Carney told the Economic Club of Canada. “In a world awash with debt, repairing the balance sheets of banks, households and countries will take years. As a consequence, the pace, pattern and variability of global economic growth is changing, and Canada must adapt.”
“Very low policy rates in the major advanced economies could be in place for a prolonged period–a possibility underscored by the recent extensions of unconventional monetary policies in the United States, Japan and Europe,” he said.
Citing the possible need for further quantitative easing in some countries, Carney commented on implications for countries caught in the middle of this economic turmoil, like Canada, and broke it down into three sections: the effect of the second round of quantitative easing in the United States; the implications for Canadian monetary policy; and he potential financial stability implications of “low for long” interest rates.
There is fear that an extended period of low interest rates could give consumers a false sense of confidence in their ability to repay debt. This fear spreads across the public, financial, corporate and household sectors. The Governor noted. “Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks, induce a search for yield, and delay balance sheet adjustments.”
Carney warns that “low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.”
Governor Carney suggested several lines of defence and, above all stressed a call to action- and to recognize the economic danger that could exist: “Cheap money is not a long-term growth strategy,” he said. “Monetary policy will continue to be set to achieve the inflation target. Our institutions should not be lulled into a false sense of security due to low current rates.”
Pass this information along to anyone who might need to read it.
Sincerely,
Peggy Hill
Broker of Record
Peggy Hill & Associates Realty Inc., Brokerage
Office: (705) 739-4455
Direct: (705) 796-8191
