The level of household debt in Canada is rising, and has become "a key source of vulnerability" for the country's economy, the Central Bank has warned.
The bank's semi-annual review of the country's financial system was released Thursday. It says that global financial conditions improved over the past six months and Canada is at less of a risk to a financial shock than it was in June.
However, the bank cautioned that the amount of debt held by Canadian households compared to their income is at "historically high levels."
That debt rate will likely become one of "the most prominent risks to the Canadian financial system" in the medium term, the bank said. It's also making the average Canadian more vulnerable to deteriorating economic conditions.
"They are concerned about the average Canadian out there," said BNN's Pat Boland. "In the last quarter the debt that the average Canadian has, compared to their income, sits at 142 per cent. That's the highest it's ever been."
"Carrying all that debt is easy to do when interest rates are low," Boland told Â鶹´«Ã½ Channel. "But if interests rates change, and move up to more 'normal' levels, then there's going to be a lot of pressure on a lot of people."
To illustrate the risk, the bank ran a simulation showing that household debt could grow if interest rates climb in the second half of 2010. The country's benchmark lending rate currently sits at a historic low of 0.25 per cent.
"Households need to asses their ability to service these debt obligations over their entire maturity," the report advises.
The bank also noted concerns about the financial position of many countries that are running steep deficits due to stimulus programs and the global recession.
"The financial crisis has increased fiscal deficits that were already rising in response to demographic pressures," the report says. "Given the potential for disruptions in credit markets and for higher risk premiums, large fiscal deficits pose a risk to financial stability."
