The Bank of Canada should raise interest rates now because five years of low rates are creating distortions in the economy, such as excessive debt and an overheated housing market, a former advisor to central bank Governor Mark Carney said on Wednesday.
‘We do not believe there is a bubble’: Canada’s largest non-bank mortgage lender speaks up after 15% share drop
Home Capital Group Inc., the largest non-bank mortgage lender in Canada, said it sees no housing bubble in the country.
“Despite a softening housing market in Canada, we do not believe there is a bubble,” Gerald Soloway, chief executive officer of Home Capital, said at the company’s annual meeting in Toronto today. “While the volume of home sales may have declined about 15% across Canada, prices have remained very stable.”
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In a hawkish stand at odds with most economists and market players, Paul Masson, now a professor at the University of Toronto’s Rotman School of Management, said the central bank should tighten monetary policy to lean against asset price bubbles rather than focus exclusively on inflation.
Masson was Carney’s special advisor from 2007 to 2008 and a senior official at the bank’s monetary and financial analysis department in the early 1980s.
The bank next sets rates on May 29. It has held its benchmark rate at 1% since September 2010.
“Some of the symptoms of inefficient investment and asset price bubbles are already evident in Canada, in the housing sector for instance,” Masson said in a paper published by the C.D. Howe Institute, a think tank.
“The cumulative effect of artificially low interest rates also risks fuelling an underlying inflationary process. … Therefore, the Bank of Canada should start now to reverse some of the monetary stimulus and begin raising interest rates.”
The May 29 policy meeting will be Carney’s final rate decision before he steps down to head the Bank of England. Stephen Poloz, head of Canada’s export credit agency, takes over as Bank of Canada governor in July.
Masson said financial imbalances and risky investment decisions are spreading. In addition to the overheated housing market, he cited record-high levels of household debt.
“The longer the boom lasts, the more likely it will end in tears,” he wrote.
The longer the boom lasts, the more likely it will end in tears
Figures released on Wednesday point to a slowing housing market, with prices rising a modest 2.2 percent in April, the smallest gain in more than two years.
Masson said Canadians living off the interest income on their investments are moving to riskier high-yield investments, making them more vulnerable in case of a downturn. Inflation is not an imminent risk, but history suggests it could return quickly, he argued.
In a Reuters poll in April of 36 analysts, the median forecast was for a Bank of Canada rate hike in the third quarter of 2014. Only one out of 36 forecasters predicted a hike as early as the fourth quarter of this year, and a minority predicted an upward move in the first half of next year.
Canada recovered relatively quickly from a 2008-09 recession, and in 2010 the central bank was the first in the Group of Seven rich nations to raise rates, lifting them from the crisis low of 0.25% to 1%.
Carney has signalled for the past year that the next move would be up, but the timing of any tightening has been steadily pushed further into the future given sluggish growth and the uncertain outlook for the United States and Europe.
Masson acknowledged signs the housing market was cooling and that inflation is well below the central bank’s target, and he sympathized with the Bank of Canada’s caution in raising rates.
“After five years of low rates, however, problems are building for the Canadian economy that make it vulnerable to a future crisis.”
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OECD says Bank of Canada to hike rates in 2014
The Bank of Canada will start hiking interest rates in the second half of next year, according to the Organization for Economic Co-operation and Development (OECD).
The Paris-based agency, which performs research for 34 developed economies, said that the central bank will be moved to raise rates due to a “tightening” labour market and higher inflation.
The unemployment rate will fall to 6.9 percent – from its current level of 7.2 percent – by the end of next year, while inflation will increase to 1.7 percent over the same time, the OECD said.
Canada’s economy will benefit from low borrowing costs, high commodity prices and an improving U.S. economy, its largest trading partner, the OECD said. A cheaper loonie will also help the economy, it added.
Consumer spending — a major driver of economic growth in the wake of the financial crisis — will continue to be supported by low interest rates, “yet restrained by tightening mortgage rules and deleveraging.”
Government belt-tightening will also weigh on economic growth, the agency said.
“In the meantime, any aggravation of housing price pressures should be addressed by further prudential measures,” the agency said. Ottawa has repeatedly moved to tighten mortgage regulations and cool the country’s housing market.
The OECD also cut its economic growth forecast for this year and next. It now expects the Canadian economy to grow 1.4 percent in 2013 and 2.3 percent next year. That’s a notch lower than the 1.8-percent and 2.4-percent growth forecasts for 2013 and 2014, respectively, the agency made back in November.
That’s also below the Bank of Canada’s forecast for 1.5 percent growth in 2013 and 2.8 percent in 2014.
The Bank of Canada has held its interest rate at one percent since September 2010, but has repeatedly warned consumers that its next move will be a rate hike. In recent months the central bank has pulled back on when it expects that rate hike to come.
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