June 11, 2015 / 2:44 PM / in 2 years

Bank of Canada says high household debt, low oil aggravate risks

OTTAWA (Reuters) - Risks to Canada’s financial system have edged up because of high household debt and the impact of cheap oil, the Bank of Canada said on Thursday, but the bank’s governor said the dangers were not severe enough to spur a change in monetary policy for now.

The jury is still out on the ultimate economic impact of lower prices for oil, a major Canadian export, but Governor Stephen Poloz reiterated his view that the worst effects will have been felt early in 2015 before positive forces take over.

In its semi-annual Financial System Review (FSR), the bank said the biggest domestic risk is that jobs and income decline enough to reduce Canadians’ ability to pay off debt, and lead to a housing price correction.

“We judge that the vulnerability associated with household indebtedness is edging higher, and the overall risk to financial stability in Canada is slightly higher than it was at the time of our December FSR,” Poloz stated.

The bank said that complicating its stance on high household debt is the “trifurcation” of the housing market, with Toronto and Vancouver red hot, the oil provinces of Alberta and Saskatchewan slowing, and the rest of Canada muddling along.

The bank said it continues to expect imbalances in the household sector and housing market to ease as the economy strengthens.

Other risks it cited are possible sharply higher global and Canadian long-term interest rates, and stress from China, other emerging markets and the euro area.

It downgraded risk from the euro area to “moderate” from “elevated” even as it noted the probability of a Greek debt default had risen. It argued that numerous European measures have made it less likely that default would result in severe euro-area financial stress.

The bank said the probability of serious harm from any of the risks it listed was low.

Poloz said markets would have to wait for the bank’s July Monetary Policy Report for a full economic update. But he acknowledged the first quarter was worse than expected and provided a weak handoff to the second. He also said the effects of bad weather may have extended into the second quarter, and that the latest trade data was disappointing.

But he highlighted strong numbers from the United States and the Canadian labor market and said that while bond yields had risen, so had oil, but that also meant the Canadian dollar had climbed.

Reporting by Randall Palmer and Leah Schnurr Editing by Peter Galloway

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