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Bullish Price Sequence

--Officials See Strains in Consumer Finances Rivaling Trade War Damage
By Greg Quinn
     OTTAWA (MNI) - Fears of reigniting a debt-fueled housing boom may prompt
Canada's central bank to continue to resist a global wave of interest-rate cuts,
despite bets on likely easing over the course of next year and signs of cooling
in property hotspots.
     Investors are pricing in a slightly more than 70% probability of a
25-basis-point cut by next October, as trade wars sap demand for Canada's
exports. The federal housing agency also downgraded its assessment of the
overvaluation of Toronto property in a report Nov. 7, and said nationwide
housing vulnerabilities remained moderate for a third straight quarter,
following 10 prior reports with a high rating.
     But while growth in population, wages and employment may suggest that
housing markets could support higher prices, BOC policy makers see consumer
finances as shaky, suggesting more disappointment for rate doves, who have
already dialled back on forecasted BOC cuts several times this year.
     "Ingredients" of risky behavior are returning after regulators slowed the
market with a mortgage stress test, BOC Senior Deputy Governor Carolyn Wilkins
said in a speech last week. Even as such rules boost the quality of new loans,
household debts will remain elevated and no one should let their guard down, she
     Mortgage lending has recently picked up, growing faster than the economy
with a 4.2% gain in September from a year earlier. Existing home sales rose 13%
in October from a year earlier, making up much of the ground lost from when the
stress test began in 2018, as a Canada Mortgage and Housing Corp. survey showed
a quarter of homes for sale are still drawing a bidding war. Prices climbed
5.8%, about three times inflation.
     Pressure for a cut may also fade with the Fed signaling its three
reductions this year are enough to put the world's largest economy back on
track. Further U.S. cuts could have boosted Canada's dollar and applied more
pressure to exporters.
     Cutting may do little to stimulate exports and investment anyway, and leave
riskier consumer spending as the main effect, an important consideration for
Governor Governor Stephen Poloz, who calls monetary policy a risk management
     Poloz last week described monetary policy as about right, and at the last
rate decision said he would "pay close attention" to consumer spending and
potential fiscal stimulus. The Wilkins remarks on household imbalances came in
the same speech where she cited IMF and BOC studies showing the economy and
financial system can withstand even severe shocks.
     "Many of the same ingredients that were present in some housing markets
three years ago-namely strong underlying demand, tight supply and low interest
rates-are present again," Wilkins said. "Lowering interest rates could provide
some insurance against downside risks to inflation. However, this insurance
would come at a cost in terms of higher household vulnerabilities."
     Retail sales and inflation are already being propped up by big-ticket
spending that often requires borrowing, backing the BOC's view the economy has
enough stimulus to keep price gains close to its 2% target.
     "The real reason why the Bank hasn't cut interest rates is its fears about
pouring further fuel on the resurgent housing market," said a research note
Tuesday from Stephen Brown of Capital Economics, who was one of the most dovish
forecasters earlier this year. Brown now sees no move in the next several
--MNI Ottawa Bureau; +1 613-314-9647; email:
[TOPICS: M$C$$$,MT$$$$,MX$$$$]