Interest rate shouldn't be seen as main tool for financial stability:central bank

OTTAWA – The Bank of Canada’s benchmark interest rate needs help in shoring up the financial system from growing risks like rising consumer indebtedness, deputy governor Timothy Lane said in a speech Monday.

Increased government spending, also known as fiscal stimulus, and regulatory changes to curb the accumulation of household debt are other tools that can be used alongside monetary policy, Lane said.

“One thing is clear: monetary policy alone cannot be responsible for maintaining financial stability,” he said in a speech at the HEC Montreal business school.

Lane said the central bank has identified the combination of climbing household debt and elevated house prices as the financial system’s most concerning vulnerability.

This weak spot has been exacerbated by the use of monetary policy, which has led to an extended era of low interest rates. The bank has repeatedly warned that indebtedness, and its associated risks, have continued to inch higher.

This creates a scenario where government spending can be used to stimulate the economy, particularly at a time of cheap borrowing rates, Lane said.

He warned, however, that at a certain point expanding public debt can have its own negative effects on the economy and the financial system.

“But these costs need to be set against concerns that prolonged monetary policy stimulus may result in an excessive buildup of private sector vulnerabilities,” he said.

“These issues are relevant to the renewed discussion of fiscal policy that is now taking place in Canada.”

Lane’s remarks reinforced recent arguments made by Bank of Canada governor Stephen Poloz.

Last month, Poloz held off on lowering the central bank’s trend-setting interest rate as a way to help the struggling economy. Poloz said the decision was made after the bank factored in the Liberal government’s pledge to pump tens of billions of dollars into infrastructure projects over the coming years.

The government is expected to unveil its infrastructure spending plans in the spring federal budget, which could be released as early as next month.

Poloz has said any fiscal measures would likely help the Canadian economy, which has suffered from falling commodity prices.

On Monday, Lane also highlighted other measures that can help shield the financial system, such as the tightened mortgage financing rules introduced in recent years. These “macro-prudential” measures brought changes, such as raising minimum down payments.

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