November 4, 2014 / 4:08 PM / 3 years ago

UPDATE 2-BoC - stimulus still needed despite stability risks concern

(Adds comments on housing, business investment and forward guidance)

By Randall Palmer and Leah Schnurr

OTTAWA, Nov 4 (Reuters) - The Bank of Canada will plow ahead with monetary stimulus despite risks from high household debt and a hot housing market, Governor Stephen Poloz said on Tuesday, pointing to recent weak data as a "brutal reminder" of the economy's fragility.

The central bank has kept its overnight rate at 1 percent for more than four years, leading to concerns this might cause a new crisis because of high household debt and housing prices.

"Certainly financial stability risks, especially those related to household imbalances, remain a concern to us here in Canada. But our economy faces significant headwinds and continued monetary policy stimulus is needed to offset them," Poloz told the House of Commons finance committee.

The ratio of household debt to income in the second quarter hit a near record high of 163.6 percent.

"We acknowledge that the risks in household balances are edging slightly higher; they're not declining as we had hoped. However we do think ... that they will be easing down," Poloz said.

Senior Deputy Governor Carolyn Wilkins said there were structural reasons why housing has been strong in Toronto, Calgary and Vancouver.

"What we don't know for sure is the extent to which there may be overbuilding and over-valuation, and we don't know ... what could trigger it to unravel," she said at the same hearing. "So that's a thing that worries me domestically."

The testimony follows the bank's Monetary Policy Report on Oct. 22, when it kept its rate on hold and said inflation pressures remained muted despite the heated housing market.

Since then, data showing declines in retail trade and in gross domestic product served as "a stark reminder that data don't follow a straight line." In French, he said it was a "brutal reminder."

Poloz expressed some optimism about the long-struggling export sector, which appeared to be benefiting from a U.S. recovery and a weaker currency.

He said it was understandable that businesses were holding back from investing, saying the number of "false dawns" in economic recovery meant companies wanted to see sustained export growth before putting out major new cash.

Members of Parliament quizzed him on his decision to drop forward guidance, an indication as to the timing and direction of the next move in interest rates.

"What we need to acknowledge is there are not just benefits to forward guidance, but there are costs," Poloz said. "Those costs are associated with markets that function in an asymmetric manner because you provided specific information on one side of the distribution and not on the other."

Wilkins said there might be a time, when uncertainty was particularly high, where forward guidance might still be useful. (Additional reporting by David Ljunggren; Editing by Chizu Nomiyama and James Dalgleish)

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