Canadians appear to be getting their household debt in order. And that’s showing up on the bottom line at the big banks. After some 15 years of fuelling bank profits, consumer loans are on the decline. Q2 earnings reports from Canada’s major banks start today (Wednesday). While the slow return to growth in the U.S. and the debt turmoil in Europe are grabbing the headlines, Canadian household debt remains the biggest domestic concern. The cautioning and cajoling by the finance minister and the governor of the Bank of Canada have been couched in fears of a housing bubble. But more than one bank analyst says, simply the level of debt-to-income leaves some households vulnerable to shocks like job loss or interest rate hikes.
The Organization for Economic Co-operation and Development wants the Bank of Canada to start pushing rates higher starting in the fall and running through next year. The group’s concerns seem to mirror the federal government’s: reining-in housing prices and containing inflation. However, inflation remains exactly where the central bank wants it, the bank’s projections for Canadian growth are looking a little too optimistic and the situation in Europe keeps showing signs of getting worse. Those factors, along with diminishing consumer loans, will likely hold rates steady even though Governor Carney will continue to hint at increases in his campaign against household debt.