Bank of Canada: cannot take lead in maintaining financial stability
By Jonathan Montpetit
MONTREAL (Reuters) - Central bankers cannot take primary responsibility for upholding financial stability because interest rates are too blunt an instrument to address potential problems in just one part of the economy, a Bank of Canada official said on Monday.
Record high consumer debt and hot housing markets in some Canadian cities have fueled worries that over-extended borrowers pose a risk to the financial system.
But Bank of Canada Deputy Governor Timothy Lane noted that while stimulative monetary policy might cause vulnerabilities to build up over time, failing to ease in an economic downturn could worsen the contraction, causing a crisis.
The central bank cut interest rates twice last year as collapsing oil prices pushed the country into a mild recession.
"Interest rates affect all parts of the economy and are too blunt an instrument to address an imbalance in just one part of the economy - household credit," he said.
He made the case for macro prudential tools, such as government tightening of mortgage regulations, to promote financial system safety, allowing the central bank to focus on inflation.
The Liberal government announced in December it would force people who want to buy more expensive homes to provide a bigger downpayment. The former Conservative government made similar moves.
In Canada's case, there has been a tension between cutting rates to stimulate growth and the disproportionate boost that would have on rate-sensitive sectors such as housing, Lane said. Continued...