It's not common for retired central bankers to criticize the current incumbent, so this intervention by former Bank of Canada Governor David Dodge is noteworthy. Dodge thinks that the high level of household debt should induce the Bank to tighten more rapidly, so as to discourage further debt accumulation. As Dodge notes, the Bank seems to be pausing its tightening cycle, possibly for many months, with its benchmark rate at just 1 percent, far below the 3 percent that the Bank itself regards as a neutral level.
Based on his comments to the House of Commons Finance Committee in his semi-annual testimony this week, it seems that Gov. Stephen Poloz may think the exact opposite -- that the high level of debt may mean that excessively rapid tightening could sink the economy. Poloz told the parliamentarians that the Bank had "recalibrated" its economic model in regard to household income and debt, and went on to say that "the economy is likely to respond to higher interest rates more than it did in the past".
This seems intuitively obvious, but also ominous. Despite some slowing in the most recently reported months, the economy is operating very close to full capacity. Even though inflation is tame, conventional wisdom would suggest that this should entail setting interest rates at least at a neutral level, or even slightly higher. If fears over household debt mean that even in current circumstances, the Bank feels powerless to tighten its policy stance, it's hard to imagine a set of economic conditions in which it will ever be able to move rates back to more "normal" levels.
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