Bank of Canada governor Stephen Poloz wants Canadians to get used to the idea of three per cent interest rates as the new normal, now that the era of rock-bottom borrowing costs is gradually fading away.
Poloz raised the benchmark rate last week for the fifth time in just over a year to 1.75 per cent – its highest level in about a decade.
He sent signals that future hikes could arrive sooner than previously expected, in large part due to the economy’s resilience and the removal of some business uncertainty following the recent agreement on an updated North American trade pact.
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Testifying before MPs on Tuesday in Ottawa, Poloz said many adults are used to the lower rates and are too young to remember the much-higher rates of the 1980s, when they climbed into the teens.
Poloz says the current rate is still too stimulative for the improved economy and he’s reiterating his warning that it will rise to what the bank considers its neutral range of between 2.5 and 3.5 per cent.
He says the pace of future rate increases is still unknown, but he adds the bank will carefully analyze how well the hikes are absorbed – particularly for the many households that have piled on considerable debt in the low-rate environment.
“We sought to put more emphasis on the notion that someday we’re going to be back at neutral – and that neutral is 2.5 to 3.5 per cent – so that people would begin to digest that as an approaching fact,” Poloz told the House of Commons finance committee.
“It shouldn’t be a hard thing for people to service their debt at those kinds of interest rates. But if people have overextended themselves, given the low interest rates, then we’ve got a transition issue. That’s why we’re putting so much emphasis on that and analyzing it so carefully, and choosing our pace as we gather the data.”