BoC: stimulus still needed despite stability risks concern

Tue Nov 4, 2014 1:59pm EST
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By Randall Palmer and Leah Schnurr

OTTAWA (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.   Continued...

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Financial System Review in Ottawa June 12, 2014. REUTERS/Chris Wattie