UPDATE 1-Bank of Canada sees debt levels stabilizing as economy improves

Wed Oct 21, 2015 12:50pm EDT
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(Adds governor's comments from press conference)

OTTAWA Oct 21 (Reuters) - The housing market and debt levels should stabilize as the economy gains strength, the Bank of Canada said on Wednesday, even as it noted lower mortgage rates are fueling borrowing, especially in Ontario and British Columbia.

As part of its Monetary Policy Report, the central bank noted that housing market activity in commodity-sensitive provinces was weakening, but has stayed strong on the West Coast and Ontario, while activity in the rest of the country was soft.

The lower cost of debt is also supporting other forms of consumer credit growth and spending, with consumption resilient despite the hit to incomes from lower commodity prices, the bank said. Canadians' debt-to-income ratio is at a record high.

After the bank cut interest rates twice this year, one of the concerns from observers has been the possible overheating of the housing market, particularly in Toronto and Vancouver.

While there's no question that the vulnerabilities in the household sector continue to edge higher, that is a rational response to low rates and is evolving as expected, Bank of Canada Governor Stephen Poloz told reporters.

At the same time, the policy actions taken by the bank have helped bring about an economic turnaround in the second-half, he said.

"What's at work there is that we're reducing the odds of there being a trigger to cause those vulnerabilities to manifest themselves as risk," Poloz said.

Poloz also pointed to a strong underwriting culture in Canada's financial system, which it benefited from during the global credit crisis in 2008-09.

The bank said it expects the housing market and household indebtedness will stabilize over the next two years as the economy recovers momentum and as household borrowing rates start to normalize.

Still, the bank warned that if there were a disorderly unwinding of imbalances in the household sector - for example, from further resource weakness or a rapid rise in global interest rates - there could be "sizable negative effects" on the economy. (Reporting by Leah Schnurr and Randall Palmer; Editing by Alan Crosby)