Canadians are taking on greater debt at a time when higher interest rates — and debt servicing costs — may be just around the corner, economists warn.

In the newest outlook, Royal Bank analysts say Bank of Canada governor Mark Carney will likely start raising rates as early as next summer.

“The next tranche of rate increases will likely come from Canada, New Zealand and the Eurozone, whose economies weathered the recession slightly better that the United States and the United Kingdom,” the economists write.

As well, Canada will outperform every G7 country in economic growth over the next two years, they predict, although the advantage in some cases will be small.

But improved economic prospects will likely come at the price of higher interest rates as the central bank moves to stave off inflation.

The economists project the trend-setting rate will rise to 1.25% from 0.25% by the end of the next year, and to 3.5% in 2011. And that means mortgage rates, for example, could see roughly similar increases.

The estimates come as Statistics Canada reported Monday that household debt rose 1.6% in the third quarter. Canadians now carry a record $145 in debt for every $100 of disposable income, about 60% higher than the early 1990s.

It’s a problem the Bank of Canada warned about last week when it called rising consumer debt from Canadians buying into the hot housing market the top risk to the country’s financial system.

“We certainly agree it’s a risk and something to watch out for,” said Paul Ferley, assistant chief economist with RBC, although he adds that he believes the housing market will begin to cool.

Economist David Ronsenberg of Toronto-based Gluskin Sheff and Associates says the housing boom defies logic. He notes incomes are down about 1% over the past year while home prices are up about 20%, yet sales were at a record peak in November.

The issue of when the central bank moves off its “lower bound” policy on interest rates remains an open question given that Carney is clearly worried low rates may be fuelling an artificial housing bubble. Carney has scheduled a speech on the subject in Toronto on Wednesday.

The central banker has said he won’t raise rates until after the end of June 2010 at the earliest, and so far economists and markets appear to be taking Carney at his word.

But once the conditional commitment is over, so is the zero interest rate policy, believes Douglas Porter, deputy chief economist with BMO Capital Markets.

“Our view is they start raising rates at the first opportunity in July,” he said.

Having consumers borrowing to buy homes, cars and appliances is precisely what the Bank of Canada hoped would happen when it cut rates to the bone last spring.

With exports falling by about a quarter in the last year, consumer spending in the domestic economy has been the prime engine of growth keeping Canada from falling into an even deeper recession.

The concern is that consumers will overextend themselves only to find they can’t afford their monthly payments once rates rise.

The Royal Bank and Statistics Canada reports contained some good news.

The statistical agency said along with rising debt, Canadians also saw a 2.3% increase in wealth creation in the July to September period, largely as a result of revived equity markets.

The Royal Bank report forecasts Canada will lead the G7 countries, including the U.S., in growth over the next two year with gross domestic product advances of 2.6 and 3.9%.

By comparison, the U.S. economy is projected to grow by 2.5 and 3.4% for the two years.

The slightly stronger growth projection and particularly the far milder recession is one reason the Bank of Canada is seen as raising rates earlier than the Fed in Washington, said the RBC.