MNI BOC State of Play:Cautiously Encouragng Fin Risk Assessmnt

By Yali N'Diaye

     OTTAWA (MNI) - While the Bank of Canada keeps monitoring "elevated" risks

in the Canadian financial system, which were the same as in June, it did strike

a more positive tone Tuesday than last summer, although cautiously so.

     The central bank indeed started its semi-annual Financial System Review

with an assessment of vulnerabilities and risks that was somewhat encouraging.

     Where the June FSR went straight to the macrofinancial conditions, the

November report started with a summary stating that "overall risks to the

Canadian financial system remain elevated." It added, "some preliminary signs of

improvement, however, are emerging."

     Looking ahead, "better economic conditions and several new policy measures

support prospects for additional progress."

     In fact, tighter mortgage rules have already improved the quality of

lending and, by the BOC's estimate, "a moderate increase in mortgage interest

rates would be significant but manageable for most borrowers, especially if it

is accompanied by improvements to household income."

     During a press conference following the release of the report, Governor

Stephen Poloz added that "We are in a situation where all the things are working

for us in the same direction."

     After the improving economy led the BOC to hike its policy rate twice this

year, Poloz also welcomed a nice "byproduct": both stronger growth and higher

interest rates work towards helping to reduce vulnerabilities at the same time.

     The BOC definitely remains vigilant about the risks, but Tuesday's

assessment of the financial system slightly lowered the bar in terms of obstacle

to future rate hikes, even if elevated debt keeps the economy more sensitive to

higher rates than in the past.

     The central bank is particularly monitoring improvement in the labor

market, as it expects stronger wage growth to help households adjust to higher

interest rates down the road.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]