BOC Gov Poloz:In Sweet Economy, Has Three Long-Term Concerns>

By Courtney Tower

     OTTAWA (MNI) - Encouraged by Canada's economic progress, Bank of 

Canada Governor Stephen Poloz said Thursday, "we are growing 

increasingly confident that the economy will need less monetary stimulus 

over time." 

     For a speech presented as three things that keep Poloz awake at 

night, he may be a sound sleeper, as he praised on a strong Canadian 

economy despite remaining uncertainties that will keep the BOC 

"cautious." 

     Canada's economy "has made tremendous progress over the past year, 

and is  close to reaching its full potential," he told a Toronto 

audience of the Canadian Club. 

     Overall, in what was essentially a repetition of concerns the 

Governor has made before, he said that the Bank would continue to be 

cautious about any policy rate changes. It would be, as Poloz and the 

Bank have often said, data dependent "in assessing the economy's 

sensitivity to interest rates, the evolution of economic capacity, and 

the dynamics of both wage growth and inflation." 

     His quick outline of the Canadian economy being in "a sweet spot," 

with "a majority of Canadian companies (are) running flat out" and 

moving to expand their capacities, was folded into his concern for three 

long-term problems: cyber threats to the financial system, high house 

prices and household debt, the jobs market for young people. 

     In the order of concerns that he presented, the first was cyber 

threats that could cause "a major disruption to our financial system." 

     Poloz said the Canadian financial system is not immune to cyber 

attacks, "despite best-in-class cyber defences." 

     The closely connected financial institutions and payment systems in 

the economy and the BOC are working together "to ensure that we have 

robust joint recovery plans in place." 

     He was confident that everything is being done by all the players 

that can be done, yet "the system may be only as robust as its weakest 

link, and that keeps me thinking." 

     Canada's high house prices and its record national household debt 

was the second concern, and here the problem and the positive sides 

seemed to be balanced. 

     The elevated vulnerabilities of the state of the housing market 

(principally that of Greater Toronto and Greater Vancouver) are showing 

signs of "prospective easing" but will remain elevated for a long time, 

he said. 

     Special mention was given in the speech to the burgeoning business 

of home equity lines of credit (HELOCs), which he warned can add to 

overall vulnerability. 

     Now "about 40% of all housing-backed loans are blended with a HELOC 

component," he said. About 40% of HELOC borrowers only pay the interest 

and nothing on the principal of their loans each month, so that debt 

loads will continue longer than in the past. Some may be using their 

HELOC to get money for speculation, such as buying a house with the 

intention of flipping it, he said. 

     New home mortgage rules that are in effect or to take effect 

starting next month likely will reduce vulnerability over time, even as 

they cause lower growth in the housing sector, Poloz said. 

     A worry is that new lenders not federally regulated and not 

following the new guidelines, may appeal to borrowers not able or 

willing to meet the new guidelines and stress tests. 

     The third long-term preoccupation of the Governor is "the tough job 

market for young people." Of more than 350,000 full-time jobs created 

this year just 50,000 have gone to young workers, he said. 

     A decade ago, before the global recession hit, nearly 68% of people 

aged 15 to 24 were participating in the labor force, Polos said. That 

hit a trough earlier this year at nearly five percentage points lower, 

"the lowest in almost 20 years." 

     Poloz called on business to help, saying "there surely is room for 

more ambitious on-the-job training programs in this picture." 

     Despite the sharp growth in employment this year, the Bank still 

sees "ongoing, albeit diminishing, slack in the labor market," Poloz 

said. 

                    OTTAWA - MNI **

[TOPICS: M$C$$$,MACDS$]