The governor of the Bank of Canada warned Wednesday that consumers and banks should not be lulled into a false sense of security because of low interest rates.
In a speech in Toronto, Mark Carney, said both parties have a responsibility not to take risks that could derail the recovery.
Consumers are helping Canada’s economic recovery outpace that of its G7 partners, Carney said, but that the recovery remains vulnerable to over-indulgence.
"When risks are still manageable is precisely the best time to act," Carney told a business audience. "We must be vigilant, and all parties must fulfill their responsibilities."
The Bank of Canada’s extraordinary low-interest rate policies are making it possible for Canadians to take on more debt, he said, but rates will increase and loans affordable today could prove unaffordable in the future.
Banks should be particularly vigilant against risky loans, Carney said, pointing out that even good loans became a problem during the U.S. subprime mortgage fiasco.
Still, while cautioning against unrestrained borrowing, Carney also said Canada's recovery may be more dependent on domestic spending because of lagging U.S. demand for Canadian exports, which could mean the rebound will be slower than usual.
The central bank has said it expects to keep its benchmark rate at a record low of 0.25 per cent at least until June. The rate has been that low since April, leading to a rise in the housing market that some economists have warned could become a bubble.
Last week the bank described growing household debt as now the biggest risk to the country's financial system, even though was still "relatively low" and not likely to become so great that it could undermine the stability of commercial banks.