Bank of Canada Governor Stephen Poloz said the country’s financial system is threatened by risks from indebted consumers and a domestic housing boom as well as European and Chinese banks, emphasizing his concern through a revamped report and inaugural press conference devoted to these stresses.
The threat that China’s growing shadow banking system could disrupt financial markets has grown to “elevated” from “moderate” since December, the central bank said today in its semi-annual Financial System Review. There are elevated risks of a sharp correction in Canadian home prices and of financial stress coming from the euro area, the report said.
Poloz increased his focus on financial risks today by holding a press conference in Ottawa, the first ever devoted to the expanded 70-page report. The emphasis on the financial system as part of the bank’s inflation-targeting regime aligns Canada with counterparts such as the Bank of England and European Central Bank, which grappled with deeper recessions and bank bailouts after the 2008 credit crunch.
Canada’s main risk is “stretched valuations and some signs of overbuilding” in the housing market, Poloz, 58 said at the press conference. “After weighing the risks to financial stability through our improved framework and applying judgment, our level of comfort as policy makers remains similar to what it was six months ago.”
The report also identified a “moderate” risk of a jump in global long-term interest rates, tied to potential market reaction to the speed of monetary stimulus being unwound by the U.S. Federal Reserve. The report’s five risk categories are low, moderate, elevated, high and very high.
Canada’s housing market has continued to show strength after the government tightened mortgage-lending rules on concern about overbuilding of condominiums in Toronto and Vancouver. The Teranet/National Bank home price index rose 4.6 percent from a year earlier in May, while the country’s housing agency said this week that construction starts unexpectedly accelerated last month.
The gains have also come as the Bank of Canada has kept its benchmark overnight interest rate at 1 percent since September 2010, close to a record low of 0.25 percent.
“Despite some signs of a soft landing, valuations are stretched and there are signs of overbuilding in certain segments of the housing market,” the report said, citing the condominium market in Toronto as a particular concern. The main scenario for a housing crash would be a shock that drives up unemployment and makes it harder for families to repay debts, the central bank said, adding that there is a low chance of that happening.
Household debt levels fell from a record in the fourth quarter as families slowed their pace of borrowing to the least in more than a decade. Credit-market debt such as mortgages increased to 164.0 percent of disposable income, compared with a revised 164.2 percent in the prior three-month period, Statistics Canada said March 14.
Such measures of consumer debt should stabilize now, Senior Deputy Governor Carolyn Wilkins said at the press conference. Poloz also said that consumer debt in Canada has a higher credit quality than in the U.S.
The governor declined to comment on yesterday’s recommendation from the the Organization for Economic Cooperation and Development that Canada should privatize the mortgage insurance provided by the government’s housing agency.
Canada has held the title of having the soundest banks for six straight years according to the World Economic Forum, the Geneva-based institution that promotes public-private cooperation and hosts an annual meeting in Davos.
European banks and governments have made some progress in the last six months in repairing their balance sheets, leading the Bank of Canada to cut its risk rating for that category to “elevated” from “high.”
China’s banking challenges pose a risk because of that country’s influence on the prices of commodities that make up a large part of Canada’s exports, the Bank of Canada said today.
The discussion of risks “will be used as additional support to underpin the Bank’s maintaining its higher accommodative stance on monetary policy when it publishes its Monetary Policy Report in July,” Randall Bartlett, senior economist at Toronto-Dominion Bank, said in a research note. “We continue to expect that the Bank of Canada will keep rates on hold until the second half of 2015.”
Poloz said today that the risks to Canada’s inflation rate remain balanced between a recent temporary jump in energy costs and slack in the wider economy.
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