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Bank of Canada warns again interest rate hike may be needed Print E-mail

April 24, 2012 Reuters business.financialpost.com

OTTAWA — Bank of Canada Governor Mark Carney repeated on Tuesday that the central bank might have to increase interest rates and he continued to fret about the high levels of debt that Canadians are taking on.

Carney used an appearance at the House of Commons finance committee to stress the central bank’s recent message that rates could have to go up despite global economic uncertainty.

“We have noted that given the state of the (Canadian) economy, the amount of slack, firmer underlying inflation, that it may become appropriate to withdraw some of the considerable monetary policy stimulus,” Carney told the committee.

“But any such decision would be taken with care and careful consideration of domestic and global risks. There’s a few clear messages there.”

The central bank, which has kept rates at a near-record low of 1% since September 2010, started mentioning last week that a rate increase might be needed because of a stronger economy and underlying inflationary pressures.

The cheap money has encouraged Canadians to borrow more heavily, particularly against the equity in their homes, prompting repeated alerts from the bank about what could happen once rates start to rise.

Carney – who says Canadians cannot keep borrowing so heavily against the value of their homes – said financial authorities were looking closely at levels of household debt and ways to contain the problem. He also made it clear that too tight a clampdown could hurt economic growth.

“There’s always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy,” he said.

Carney also noted that Canadians appeared to be listening to repeated warnings not to take on too much debt.

“What we’ve also seen in recent months is that the proportion of variable rate debt on new debt that’s being taken on – new mortgages being taken on – has gone down quite substantially,” he said.

Some analysts fear that booming property prices in some big cities could presage a housing bubble, and Carney said he was concerned about the value of condominiums in metropolitan areas such as Toronto.

“There are some cases where valuations are firm, shall we say, and that there’s probably more downside risks than upside risks to the future evolution of prices so that’s an environment that warrants caution,” Carney said.

Below are some other key quotes:

ON HOUSEHOLD DEBT:

“Authorities — the bank, the superintendent, CMHC, Government of Canada — are cooperating closely and monitoring the situation … there had been a number of measures that had been taken both by the superintendent, by the government. We .. have a heightened vigilance with the underwriting practices of the banks. So on a supply side there are a variety of measures that have been taken and are resulting in a slowing of the accumulation. There’s always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy.”

ON THE CONDO MARKET:

“The level of housing activity in some, particularly the level of condo activity in some metropolitan areas, is quite high, in fact reaching in Toronto to levels last seen in the late 1980s, adjusted for population … and we have some concerns over those developments.”

ON THE NEED TO CUT DEBTS:

“There is no question that sovereign risk is bearing heightened scrutiny by investors and that a variety of governments around the world, particularly in the advanced economies and across the G7, are challenged with getting this right, getting the balance of the path of the consolidation of deficits on the right path. I would note that one of the challenges that face some of the major European economies that are most in the sights if you will of the markets is that there is a challenge of the pace of growth of expansion of nominal GDP which has a procyclical impact on efforts to reduce deficits and makes it even more challenging for them.”

“Canada is in a leading position within the G7 in terms of our combined government finances. If you look on a net debt-to-GDP ratio it’s lower than all other G7 countries … there is a strong sense of confidence in markets that are evidenced in our spreads on our bonds to other international bonds, on our spreads on our credit default swaps, a strong level of confidence in the credibility of those plans.”

ON VARIABLE RATE DEBT:

“In taking on new debt Canadians need to think about the carrying costs of that debt over the lifetime of the loan or the mortgage and size it appropriately and decide between the terms, fixed or variable, appropriately. I will note as a final point that what we’ve also seen in recent months is that the proportion of variable rate debt on new debt that’s being taken on — new mortgages being taken on — has gone down quite substantially and is running in the low teens at present.”

© Thomson Reuters 2012

 
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