The Bank of Canada Governor Mark Carney has explained that Canadians shall be living with the impact of the global recession well into the future.
The current situation in Europe is a reminder that the crisis is not over; rather it has entered a new phase. Carney explained at the Economic Club of Canada that in a world awash with debt, repairing the balance sheets of banks, households and countries would take years to recover.
What Carney has suggested, without making any promises, is that interest rates in Canada wills stay at historically low levels for some time to come. Very low policy rates in the major advanced economies can be placed for a prolonged period noted Carney.
He repeated his warning that the high level of debt accumulation by Canadians during this period of low borrowing costs may cause risks for society and the economy. Without any significant change in behavior, the proportion of households that would be susceptible to serious financial stress from the shock will continue to grow.
In his latest speech, there was no new forecast given for the Canadian and global economies; we can expect to see something said from Carney at the next interest rate announcement, which will be held on January 18th. There is one thing that is clear at the moment, the central bank governor has become alarmed by what is happening in Europe and the U.S.
What are the possible solutions?
The solutions at the moment are difficult, however as he mentioned last week, the release of the bank’s financial systems review, Carney has noted that China and other Asian countries with artificially depressed currencies as particularly inflexible.
With currency tensions rising, there is a concern about protectionist measures, similarly with that occurred during the Great Depression due to the U.S. dollar.
With global adjustment, it means that Canadian exports will remain weak; he has urged firms to improve their competitiveness to meet the challenge.
However, the bigger warning is for borrowers, who are being pulled into a false sense of security because of the low interest rates.
With that said for borrowers, we need to remember that if you follow what can be considered a golden rule for spending, you can avoid borrowing too much. The golden rule in my opinion is live within your means; in order to do that you should spend less than you make, which not only allows you to save but live a comfortable life.
Keeping that in mind you should be able to avoid accumulating a high level of debt, despite being attracted to low interest rates available. No matter how attractive these low rates might be, keep in mind that it is not worth committing yourself to something, and being forced to lose it because you are unable to pay back your debt.