mark carney : current issues in household finances remarks by mr mark carney, governor of the bank of canada, at the national forum ( canadian club of toronto and empire club of canada ), toronto, 16 december 2009. * * * introduction as the holiday season approaches, our attention turns naturally to the home front. accordingly, my comments this afternoon will focus on households. i would like to concentrate in particular on the implications of canadian household finances for financial stability in our country. i spoke here in toronto a year ago, almost to the day. then, the global financial sector crisis was buffeting the real economy. businesses were postponing large investments, and households were hesitating over major purchases. it was clear then that 2009 would be a difficult year, and so it has proved. with more than 400, 000 jobs lost and a $ 30 billion fall in output, the canadian economy has suffered a deep, albeit brief, recession. today, the outlook has improved. while significant fragilities remain, the global economic recovery is now supported by several factors. first, feedback between financial markets and the real economy has reversed direction. in most major economies, the inventory cycle has turned and housing sectors are stabilizing. in addition, considerable fiscal expansion and monetary stimulus are supporting domestic demand. nonetheless, the bank expects underlying private demand in many economies to recover only slowly, as significant balance sheet and structural adjustments have yet to run their course. in particular, the rebound in u. s. consumption is projected to be more moderate than in previous cycles. this will have direct implications for canada. while the canadian economy will likely grow faster than the other g - 7 countries next year, the bank expects our recovery to be more protracted and more reliant on domestic demand than usual ( chart 1 ). in the near term, canada will grow despite – not because of – the pace of external activity. the behaviour of canadian households will thus be particularly important. before turning to that in more detail, i would like to briefly review the challenges facing u. s. households, both for their direct impact on canada and for the insights they offer for financial stability. u. s. household sector for a generation, u. s. households increasingly “ saved ” through capital appreciation rather than from current income. over the last three decades, u. s. consumer spending grew substantially faster than national income, driving the ratio of consumption to gdp from 62 per cent to a record 70 per cent (

to be well justified as total inflation fell back into line with core inflation. the ongoing effectiveness of monetary policy the bank's projection of an economic recovery reflects, in part, the monetary easing that we have already put in place – cutting the policy rate by 350 basis points since december 2007. guided by its forward - looking framework, the bank began cutting interest rates sooner – and has cut deeper – than most other central banks. with the usual lag, these moves will have a powerful impact on economic activity and inflation. nonetheless, some are questioning, with rates already so low and global credit markets strained, whether the bank's moves can still have an effect. we know from experience that inflation control works much more predictably when there are well - functioning financial markets operating within a sound and stable financial system. the canadian system has been under some strain since the onset of global difficulties, but it is important to keep those strains in perspective. it bears repeating that the canadian banking system does not face the same challenges as those in other major economies. canadian banks had modest exposures to the u. s. subprime market and other complex structured products. more importantly, our banks are better capitalized and substantially less leveraged than their international peers. in contrast to many international banks, which face enormous pressures to scale back their assets and liabilities to bring them into line with their capital, canadian banks have actually been raising private capital to grow their businesses. indeed, over the past year, they have raised over $ 15 billion in tier 1 capital from the private capital markets. consequently, canadian banks continue to lend. this is significant, because banks are a more important part of our financial system than in many other countries, and their relative strength means that total credit is continuing to grow in canada. that said, we expect this credit growth to slow in the coming months as result of declining demand during the recession. it is worth noting that our lower overnight rates have largely been passed through at shorter maturities. since the easing cycle began in december 2007, we have lowered the overnight rate by 350 basis points. the prime rate has fallen by 325 basis points, bankers acceptance rates ( key short - term financing instruments for corporations ) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points. at longer maturities, the declines have been more modest. in part, this reflects the typical pattern, as long - term rates tend to be less volatile than short - term rates over