Personal debt: a look over the Atlantic

The UK isn`t alone in its debt problems. You may have heard the arguments about when and how quickly interest rates should go up and what the effects could be - but rest assured we`re not the only ones with questions like these to answer.

A recent article in The Globe and Mail, called `The Catch 22 of low interest rates, fat debt`, looks at the issues that Canada is facing - issues that might sound pretty familiar to people on this side of the Atlantic.

`Some people,` it begins, `want to know why the Bank of Canada would consider raising interest rates when high consumer debt levels are such a threat. Still others wonder why the central bank doesn`t just go ahead and do it to discourage borrowers from taking on more than they can handle.`

As in the UK, one thing the Bank has to take into account is its inflation target, which is 2%, just as it is here. Higher interest rates could bring down inflation by slowing down borrowing and spending, but they could also make things very difficult for people with debts to service - at a time when many are already struggling.

In Canada (again, as in the UK) low interest rates and increasing house prices have helped create a situation where a lot of people are carrying a lot of personal debt: household debt now stands at 148% of disposable income.

`These high debt levels are now a threat,` the article states. `If things go south, a shock could spread through the economy.`

It quotes Agathe Côté, Deputy Governor of the Bank of Canada: "Some have asked if increasing interest rates poses such a threat to households, why raise them? Yet others have asked if household debt is such a concern, why not raise rates and discourage borrowing?"

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