Bank of Canada governor Mark Carney repeated warnings to Canadian households and businesses Monday: don't be lulled by current low interest rates, because repercussions from a hike could be swift.

In a speech to the Economic Club of Canada in Toronto, Carney said efforts by various governments to stimulate the economic recovery are keeping borrowing rates low.

Bank of Canada governor Mark Carney warned Monday that when interest rates begin to rise again, the repercussions may be swift and fierce. (Nathan Denette/Canadian Press)

When rates do begin to rise again, Carney said, the repercussions may be fierce and have the potential to catch many with debt loads they can no longer afford.

Both Finance Minister Jim Flaherty and Prime Minister Stephen Harper weighed in with opinions on consumer debt Monday.

Flaherty said he talks with bankers about loan default rates, and "there is reason for concern," but not "extreme concern." The government has no plans to take immediate action, he added

Flaherty pointed out that the government has twice tightened mortgage rules, in 2008 and early 2010, and will do so again if it becomes necessary.

But he said the government has to balance the availability of credit, and the impact on employment in the housing sector if rule tightening led to a construction slowdown.

During a visit to Thetford Mines, Que., Harper suggested the situation is the result of individuals' choices, and the government can't control how they spend.

"We continue to warn Canadian households that interest rates are unlikely to go down in the future. They're far more likely to go up, so Canadians should plan accordingly," he said.

Carney's warning came the same day Statistics Canada released data showing the ratio of Canadian household debt to disposable income rose to a record high in the three months ending in September.

"Cheap money is not a long-term growth strategy," he warned.

"Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks."

Hike expected May 31

Flaherty said Canadians should assume rates will rise, "and they should be cautious."

The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt, Carney added.

He suggested the bank may raise interest rates even in a low-inflation environment to discourage risky borrowing.

"While the bar for further changes remains high," he said, "the bank has the responsibility to draw the appropriate lessons from the experience of others who, in an environment of price stability, reaped financial disaster."

In a commentary, Benjamin Reitzes, an economist with BMO Capital Markets, wrote: "It appears that as soon as economic conditions allow, Carney & Co. will opt to push rates higher in an effort to keep debt levels from marching ever higher.

"For now, look for bank officials to continue their public warnings in an effort to at least make households aware of the risks of borrowing beyond income bounds," Reitzes said.

"We expect the bank's next hike will come on May 31, as the economy regains some momentum in the first half of next year."

'The crisis is not over, but has merely entered a new phase.'—Mark Carney, governor, Bank of Canada

On Dec. 9, the Bank of Canada warned that the risks of another recession are growing, given Europe's debt crisis, widening gaps between exports and imports among countries, and that Canadians, with their high levels of debt, may not be prepared for it.

Japan's lost decade

Twice in the speech, he raised the spectre of Japan's lost decade and even the Great Depression, suggesting some of the problems faced today are as formidable.

"The crisis is not over, but has merely entered a new phase," he said. "In a world awash with debt, repairing the balance sheets of banks, households and countries will take years."

"As a consequence," he said, "the pace, pattern and viability of global economic growth is changing, and Canada must adapt."

Carney said with currency tensions rising, there is a concern about protectionist measures as occurred during the Great Depression because of the "death grip" of the U.S. dollar as the world's preferred currency for foreign exchange reserves.

"Over a dozen countries are now accumulating reserves at double-digit annual rates," he pointed out, "and countries representing over 40 per cent of the U.S.-dollar trade weight are now managing their currencies," or subtly manipulating them.

The global adjustment means Canadian exports will remain weak, he said, urging firms to improve their competitiveness to meet the challenge.

With files from The Canadian Press