As far as the high level of Canadian household debt goes, the Bank of Canada’s surprise rate cut on Jan. 21 is looking like one factor that has helped the situation improve.
Financial stability concerns stemming from an overheating housing market and highly leveraged households wouldn’t ordinarily suggest a rate cut is needed to make things better. But with the sharp drop in oil prices being the most significant problem the central bank had to deal with, a rate cut to help boost aggregate income and spending was the medicine it prescribed.
BoC governor Stephen Poloz reiterated his rationale for the rate cut in a panel discussion at the Bank for International Settlements (BIS) in Basel, Switzerland, on June 28.
He talked about a “neutral zone” for monetary policy, meaning inflation is at or is expected to reach its target within a reasonable timeframe and financial stability risks are evolving in a constructive manner. Canada had been in this neutral zone since late 2010, but that changed in January.
“The oil shock was big enough to move us out of the neutral zone, so we eased monetary policy in January,” Poloz said.
He admitted the rate cut was very controversial, as the central bank would be questioned about the risk of worsening the financial vulnerabilities from the housing sector.
“We were hoping to boost spending to offset the impact of the oil shock,” Poloz said. The Bank figured some of this spending could come from more borrowing.
“Our primary mission is to achieve our inflation target. This means getting the economy back to full capacity over a reasonable timeframe. Other issues must be subordinate, and I think of them as side effects,” Poloz said.
“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you. You just go ahead and manage them somehow.”
And yes, housing markets in Toronto and Vancouver have gotten even hotter. The Canadian Real Estate Association reported on June 15 that the national average sales price rose 8.1 percent on a year-over-year basis in May, but that the national average increase was only 2.4 percent excluding Vancouver and Toronto.
