Poloz may tap the interest-rate brakes as a promise and a warning: Don Pittis

"Kids nowadays just don't know the value of money" is a classic parental complaint.

A decade of low interest rates has made that curmudgeonly folk wisdom truer than ever. And it's not just kids.

Now that Bank of Canadagovernor StephenPolozhas all but announced he is raising interest rates this week, the number of otherwise moderate voices that seem angry may beevidence how true that chestnut is.

Yellow light or red?

"When you are driving towards a red stoplight, you ease up on the accelerator well before you get there instead of waiting for the last second to stop," Poloz said in a German interview last week.

Essentially the bank governor'sjustification for raising rates seems to bethat an economy on the go meansinflation is just around the corner and that slamming on the interest-ratebrakes at the last minute is a bad plan.

That may be true, but there could more to it.As usual, interpreting the words and actions of central bankers is far from simple.

As Poloz has said repeatedly, the bank's main goal is to keep inflation in check.

Asnearly everyone has noticed, inflation remains far below the level where central banks must take evasive action. Even if inflation suddenly showed a surge to 1.5per cent, the bank would have plenty of time to brake slowly before the three per cent upper limit.

It looks more like a yellow light than a red. So maybe there is something else going on.

Despite its emphasis on inflation, the central bank has a second role,less discussed but maybe even more important. That is to preserve domestic and international economic stability.

Those lower-for-longer interest rates have had a real impact, even if not exactly whatthe bank might have liked.

Borrowing like no tomorrow

As long-time money manager Hilliard MacBethreminded me on the phone yesterday, the lending industry that used to be directed at businesses has refocusedon consumers. MacBeth, author ofWhen the Bubble Bursts: Surviving the Canadian Real Estate Crash,has warned repeatedly that those consumers don't realize the trouble they are creating for themselves.

• Mortgages won't be only problem as rates rise

In the past, economies have gone through a cycle. A period of cheap money that is, low interest rates is followedby a period where money is no longer cheap.

To give the economy a bit of abump over a bad patchcentral banks have done their best to make that natural cycle go away. They have temporarily made money artificially cheap.

Interfering in the natural ebb and flow of the economy is bound to have an effect.

While Canadian businesseshave so far been reluctant to borrow and spend, Canadian consumers have shown no such reticence.We know that when it comes to debt(and eatingand drinking), many otherwise bright people have difficulty seeing the future.

While it may appear that Poloz is controlling the levers of the economy, he is really doing something else. He is influencing the psychology of borrowers and lenders by manipulating their expectations.

As we have reported,that psychological processis complicated.

For one thing, if businesses think Poloz is worried about the economy, as indicated by low rates, they might be worried too and fail to invest.

An increase in rates would indicate he thinks things aren't so bad.

On the other hand, consumers who have never seen a period ofrising rates may have become irrationally fearless about piling on debt, forgetting that money will not stay nearly free forever.

Travelling too close

To extend the governor's driving analogy, it is likemotorists in the habit of following too close who havelearned not to worry, because, so far, nothing bad has happened.

"It is not the role of monetary policy to protect individuals from making bad choices,"Polozsaid in 2015.

But at the same time he said something that seemed a direct contradiction.

"The idea that central bankers should pay little heed to financial stability issues and simply 'stick to our knitting' of inflation control a position once advocated by many seems quaintly naive," he said

Like the signals we give when we are driving, the actions of a central bank are a method of communicating with borrowers and lenders in a way more powerful than mere words.

An actual rise in rates would showbusinesses that this time, Polozreally is confident that the economy is on the road to recovery.

And for those over-indebtedconsumers who have never seen a rate rise? A tap onthe brakes can remind the person travelling too close that sudden stops can happen.

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