Red-Hot Canadian Housing Markets Won’t Prevent Rate Cut

Bank of Canada Governor Stephen Poloz says home prices won’t be determinative, but other reasons may stay his hand.

Bank of Canada Holds Rates Steady at 0.5%

Soaring home prices in Vancouver and Toronto won't keep the Bank of Canada from cutting rates to stimulate the economy, if it comes to that.

That's the takeaway from an interview Bank of Canada Governor Stephen Poloz gave the Wall Street Journal after the release of the central bank's policy decision on Wednesday, in which it left its benchmark rate unchanged at 0.5 percent.

"I don’t think of it as something that blocks us from changing interest rates," Poloz said in response to a question about whether housing-related vulnerabilities would prevent a future interest rate cut. In a 2014 discussion paper (PDF), Poloz wrote that financial stability concerns of this nature "are not generally seen as a significant constraint on monetary policy actions." 

However, the rate of home price appreciation in Toronto—and especially in Vancouver—has been anything but typical.

Poloz's affirmation that household imbalances won't color decision-making probably comes as a surprise to some analysts on Bay Street and Wall Street. In the run-up to the bank's decision and in the commentary that followed, many private-sector economists suggested monetary policy makers would be reluctant to further inflame household debt and imbalances in the real estate market, which have been cited as key vulnerabilities in the domestic financial system.  

"When we saw the comment on imbalances in the statement, I thought that might represent a signal that the bar to a cut is a little higher," said Brian DePratto, an economist at Toronto-Dominion Bank. "The interview would suggest that's not the case."

Others cautioned against putting too much weight on the comment by Poloz, as it belies the bank's recent messaging and emphasis on household imbalances that feature prominently in the bank's statement, its Monetary Policy Report, and Financial System Review.

"The height of the bar for a cut, so to speak, would, of course, be higher if household imbalances were included," said Frances Donald, senior economist at Manulife Asset Management. "But household imbalances aren't the only—and may not be the primary—reason to not cut rates further."

Cutting rates won't help investment in the oil patch recover, she said. Meanwhile, a significant drop in the currency could drain the Canadian consumer's purchasing power. That could cause a problem for the bank, which is counting on consumption to drive growth in 2016. In addition, Poloz appears disinclined to approach the zero lower bound for interest rates, according to Donald.

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