Bank of Canada Gives Indebted Consumers a Vote of Confidence

Updated on
  • Bank of Canada forecasting consumer spending at new highs
  • Projections downplay disorderly unwind of housing market

Record household debt? A housing bubble? No worries.

Bank of Canada Governor Stephen Poloz’s decision Wednesday to raise interest rates was a major vote of confidence in the country’s indefatigable households, with policy makers expecting the remarkable run of spending to continue, despite bloated debt levels and record real estate prices.

Households will account for about two-thirds of growth over the next three years, the central bank projected Wednesday. That would extend a pattern over the past 15 years that has seen consumers carry the bulk of the economic load. The difference: Canadian households have never owed so much.

“That part of it -- the composition -- didn’t sit completely comfortably with me,” Mark Chandler, head of fixed income research at Royal Bank of Canada, said in a telephone interview.

The chart below shows how the numbers imply household consumption will rise to new highs as a share of GDP.

The Bank of Canada estimates household spending will contribute 1.9 percentage points to projected growth of 2.8 percent this year. Outside of stronger household spending in 2017, the outlook for everything else over the next three years is little changed from April. In 2018, household spending is adding 1.3 percentage points to projected growth of 2 percent.

The projections downplay any major chance of a disorderly unwind of Canada’s housing markets. The whither-Canada story had featured prominently in investor circles earlier this year, stoked by house price gains that far exceed incomes; the recent run on deposits and share collapse at mortgage lender Home Capital Group Inc.; and a downgrade of the nation’s banks by Moody’s Investors Service.

The consumption boom has been driven by a binge on cheap credit to purchase big-ticket items like homes and cars, pushing the ratio of household debt to disposable income to nearly 170 percent. Any increase in borrowing costs will eventually make it more expensive for Canadians to pay interest on the C$1.5 trillion ($1.2 trillion) in mortgage credit and C$581 billion in consumer credit they have racked up.

Hawkish Stance

Wednesday’s rate decision was seen as a hawkish move by the Bank of Canada that set the central bank on a path of normalization. The Canadian dollar jumped to a one-year high after the central bank raised interest rates for the first time since 2010, with the yield on the country’s two-year government bonds surging to the highest since 2013.

A research roundup of the rate decision can be found here.

Coverage Wrap

Here is a wrap of Bloomberg coverage of the Bank of Canada’s move. Read the full TOPLive blog of the rate decision, here.

Bank of Canada Takes First Cautious Step Toward Higher Rates

  • Canada cautiously became the first Group of Seven country to join the U.S. in raising interest rates on Wednesday, feeding speculation the world’s central bankers are entering a tightening cycle.

Damn Disinflation, Full Speed Ahead With a Canadian Rate Hike

  • If economics were behind the policy action, the Bank of Canada might be cutting rates to address the anticipated slowdown and arrest the sinking pace of core inflation, writes Richard Yamarone of Bloomberg Intelligence.

Canadian Oil Patch Losing Loonie’s Cushion as Poloz Lifts Rates

  • The Bank of Canada’s decision to increase its benchmark interest rate by a quarter point to 0.75 percent will raise borrowing costs for oil producers already grappling with prices stuck near $45 a barrel. 

Poloz Credits Government for Growth, But Trudeau’s Still Nervous

  • Stephen Poloz called it “good news for Canada” -- its economy is leading the Group of Seven in growth and the era of rock-bottom rates is ending. It won’t be all good news for Prime Minister Justin Trudeau.

Poloz Case for Tightening Rests on View Inflation Will Rebound

  • Bank of Canada Governor Stephen Poloz just raised interest rates, even as the latest data show inflation creeping further below his 2 percent target. That means the central bank is betting price pressures will turn around as an economic recovery gains momentum.

CIBC Boosts Loonie Forecast After Rate-Hike Rally Clobbers Bears

  • The loonie is soaring, and it’s not coming down any time soon, according to one of Canada’s biggest banks.

Canadian Banks Lift Prime Rate to Match Monetary Tightening

  • Canada’s six biggest banks raised their prime lending rates for the first time since September 2010 after the nation’s central bank tightened policy on Wednesday.

Loonie Strengthens to One-Year High After Canada Raises Rates

  • The Canadian dollar jumped to a one-year high after the central bank raised interest rates for the first time since 2010.

BlackRock Sees Canada Stocks Rebounding After Rate Increase

  • The Bank of Canada’s first interest-rate increase since 2010 is confirmation of an improving economy and better conditions for equities, according to the world’s largest money manager.

The Bank of Canada Shows It’s the Federal Reserve of the North

  • A North American central bank hiking rates in the face of strong job growth and deteriorating core inflation rates, citing temporary factors for the drop-off in price pressures. No, it’s not Janet Yellen’s Federal Reserve -- it’s Stephen Poloz’s Bank of Canada.

CIBC Is the Most Exposed to Canadian Interest-Rate Fluctuations

  • CIBC is predominately sensitive to shifts in Canadian interest rates, as the bulk of its operations are domestic. Given a 25-bp policy interest rate increase and potential for a second increase, CIBC will likely see relief from recent interest-margin pressure.

— With assistance by Greg Quinn

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