Economists mount pressure on the Bank of Canada to signal an interest rate augmentation, as they worry about a rapid rise in domestic house prices after eight years of rock bottom borrowing costs.
Since the last global financial crisis, the economy had struggled to gain jerk, thus, in an effort to stimulate it, the central bank has kept its policy rate at or below one per cent since 2009. But house prices have more than doubled over the period in the two biggest markets, Toronto and Vancouver, and a closely watched measure of a country’s vulnerability to debt, the household debt-to-income ratio, has risen to a record high 167 per cent.
The economists concern is that low rate in place for too long could encourage too much borrowing and leave the economy vulnerable if growth slows or house prices drop, while investors have seized on recent hints of risks to financial stability.
Carlos Capistran, head of Canada and Mexico economics at Bank of America Merrill Lynch said: “the way you reduce the pace of credit growth and eventually solve the problem of high leverage is by having higher rates, not by keeping rates low”. “It is painful for the economy when you start tightening but you have to do it at some point. Otherwise, leverage is going to keep increasing”.
In a sign the government’s measures are helping to curb in runaway property prices, the latest data showed Canadian home resales fell in April. But it is unclear how long the adjustment will persist.
David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. said it is time for the Bank of Canada to at least signal their intent to take back the two emergency rate cuts in response to the energy meltdown.
After a decline in the price of oil in 2015, one of Canada’s major exports, the central bank cut rates twice, to leave its policy rate at 0.5 per cent; a level that Rosenberg said is out of place with recent strength in the domestic economy.
As the central bank attach little importance to the sustainability of recent stronger-than-expected growth, the market has largely given up on prospects for a rate augmentation this year; even though economists say Canada could grow as much as 4 per cent in the first quarter after a solid expansion in the second half of 2016.