Despite some earlier signals by Bank of Canada Governor Mark Carney that it may be time to increase the central bank’s interest rate to curb household debt, the overnight bank rate remains unchanged at one per cent.
The same rate has been in effect for 25 consecutive months, mirroring the rate of the 1950s, when “Uncle Louis” St. Laurent was prime minister, Vincent Massey was appointed the nation’s first Canadian-born governor-general, and the CBC opened Canada’s first TV station in Montréal.
Carney had been warning Canadians to bring down household debt to a more manageable level or he will be forced to step in and force the issue.
According to Statistics Canada, Canadian household debt was 167 per cent of income in the second quarter, which the Bank of Canada considers to be a threat to the nation’s financial stability.
“Households need to slow their borrowing on their own,” said Avery Shenfield in a CIBC World Markets report, “or else the bank of Canada will give them a reason to do so. As we expected, but in a bit of a surprise to some in the market, the Bank of Canada wasn’t prepared to turn hawk to dove just yet.
“It acknowledged that containing inflation doesn’t require a rate hike now, or even soon ...,” he added.
Shenfield said Carney is content to stand on the sidelines and let events unfold, as the central bank has made no significant changes in its economic outlook.
“Over time,” according to the Bank of Canada release, announcing no rate increase, “some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the two per cent inflation target.
“The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”
The Bank of Canada is projecting that the national economy will grow by 2.2 per cent in 2012, 2.3 per cent in 2013 and 2.4 per cent in 2014.
According to the Bank of Canada, it’s keeping its rate the same, because, notwithstanding the slowdown in global economic activity, prices for oil and other commodities produced in Canada have, on average, increased in recent months. As well, global financial conditions have improved, supported by aggressive policy actions of major central banks, but sentiment remains fragile.
The central bank expects the economy to pick up and return to full capacity by the end of 2013.
“Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon.”
“These challenges include the persistent strength of the Canadian dollar,” according to the bank, “which is being influenced by safe haven flows and spillovers from global monetary policy.
Shenfeld said household debt is manageable at this time, and there is an indication that it will decelerate.
“Much of the recent debt growth has been in the mortage market, driven by brisk sales, but also by rising prices that home buyers had to chase with ever larger mortgages,” he commented. “In the face of recent changes in mortgage insurance rules, lofty prices that make taking the plunge less attractive, and the end of a catch-up period in which construction has outpaced the trend in household formation, there are good reasons to expect mortgage volumes to settle down in 2013, even without a tightening,” Shenfeld added.
He expects Carney’s weapon of rate hikes aimed at debt levels to remain on the shelf for the next year.