UPDATE 1-Canada housing oversight would ease cenbank's dilemma - economists

Mon Jul 13, 2015 4:54pm EDT
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(Adds Finance Department reaction, paragraphs 12-13)

By Randall Palmer

OTTAWA, July 13 (Reuters) - Canada should make the central bank's job easier by splitting off responsibility for risks such as overseeing the hot housing market, leaving it to focus on inflation and the broader economy, economists said ahead of a key interest rate decision this week.

The Bank of Canada will decide on Wednesday whether to stimulate a flagging economy by cutting interest rates for the second time this year, a move that would pour fuel on a property market it has called overvalued.

But the government could ease such dilemmas if it followed the lead of Britain and others that separate monetary policy from financial stability issues, two former senior Bank of Canada officials wrote in a paper last month. (tinyurl.com/pvxsu5a)

"It would take away one of the big roadblocks to a potential rate cut," said Bank of Montreal Chief Economist Doug Porter.

Their recommendations included setting up a clear framework for what is known as macroprudential regulation, using regulatory tools such as requiring larger mortgage down payments.

The Bank of Canada's main mandate is to control inflation. Both BoC Governor Stephen Poloz and predecessor Mark Carney, who now heads the Bank of England, have said interest rate policy should be the last line of defense against systemic risk or financial instability.

After January's surprise rate cut, Poloz said the bank had considered the fact that this might boost Canada's high household debt levels by encouraging borrowing, but decided it was a risk it had to take.   Continued...