A senior Bank of Canada official says the central bank is looking at how the high levels of household and public debt could pose a challenge to how it manages monetary policy.
In a speech to the Manitoba Association for Business Economists, deputy governor Lawrence Schembri says high debt levels mean there is less space, on average, for more borrowing to stimulate demand.
The central bank is also looking at what the gradual decline in interest rates over the past 25 years and a reduction in the estimates of the “neutral interest rate” mean for the monetary policy framework.
Schembri says the trend rate of economic growth has been decreasing and that could also pose challenges because cyclical forces that normally help propel an economy out of an unexpected downturn may be less powerful.
The Bank of Canada sets its key interest rate target with the goal of keeping inflation at two per cent.
It has raised its target for the overnight rate three times in the past year after cutting it in response to a drop in oil prices. The benchmark rate, which influences the prime rates at Canada’s big banks, stands at 1.25 per cent.
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