11 Jun

Household debt, housing remain key risks for financial system: Bank of Canada


Posted by: John Dunford

OTTAWA — Canada’s housing market and high levels of consumer indebtedness remain the top vulnerabilities for the financial system but both have shown signs of easing, according to the Bank of Canada.

The central bank said in a report that worries about the amount Canadians owe have begun to pull back, but it remains a concern.

“Because the total amount of debt carried by Canadian households is so large, we know that it will be with us for a long time,” Bank of Canada governor Stephen Poloz told a news conference.

The assessment came in the Bank of Canada’s latest financial system review, which assesses key vulnerabilities that could amplify or propagate economic shocks.

Key risks associated with the vulnerabilities include a severe recession, a house price correction in overheated markets, and a sharp spike in long-term interest rates.

Federal mortgage lending rules have been tightening in recent years with the application of stress tests on borrowers. New rules implemented at the start of this year introduced a test for borrowers who do not require mortgage insurance and had not previously been subject to stress testing.

The central bank said it will monitor the extent to which borrowers seek out alternative lenders, such as credit unions and private lenders, who are not always subject to the federal rules.

“It’s still too soon to fully assess the impact of the newest changes to mortgage lending guidelines,” said Poloz, who added the bank is scrutinizing the housing and mortgage data as it becomes available.

The tighter lending rules, and higher mortgage rates from lenders, have helped to cool the housing market in recent months from the red-hot pace it set at the start of last year.

The central bank has raised its key interest rate three times since last summer and is expected to raise it again later this year, perhaps as soon as July. The increases have prompted the big Canadian banks to raise their prime rates, which are used to set the rates charged for variable-rate mortgages and other floating-rate loans. The cost of new fixed-rate mortgages has also climbed in recent months as bond yields have risen.

In assessing the housing market risk, the report noted that housing price growth has slowed, led by a drop in the Greater Toronto Area. However, it said the condominium markets in Toronto and Vancouver remain strong with some evidence of speculative activity.

In addition to household debt and the housing market, the report also identified cyberattacks as a key area of concern.

“Even as defensive capacity improves across the financial system, some attacks will inevitability succeed,” the report said. “Having strong recovery plans can help to quickly restore financial system functioning and prevent a loss in confidence.”

Last week, two of Canada’s biggest banks warned that personal and financial information of up to 90,000 customers may have been accessed by “fraudsters.”

The Bank of Canada report comes as fears of a trade war have increased with the U.S. implementing new tariffs on steel and aluminum imports and Canada replying with its own tariffs on U.S. goods.

Poloz said the impact of the tariffs will be part of the Bank of Canada’s next monetary policy report, but added that the overall economic backdrop has improved over the past six months and that’s good for financial stability.

The Bank of Canada announced Thursday that it will no longer publish its financial system review report twice a year.

The report will become an annual review published in June, and a member of the bank’s governing council will make a speech in the fall to update its assessment of the vulnerabilities and risks to the financial system.

It will also create a new financial system hub on its website that will publish research and analyses throughout the year.

The Bank of Canada’s quarterly monetary policy report will also include a more in-depth discussion of the relevant issues as warranted.

8 Jun

U.S. May Unemployment Rate Falls Again to 3.8%


Posted by: John Dunford

Today’s May employment report showed the jobless rate dropping unexpectedly even further to 3.8%–considerably below the level the Fed once considered to be full employment. It wasn’t long ago that the Fed estimated the long-run equilibrium jobless rate in the range of 4.3%-to-4.7%. Economic theory tells us that very tight labour markets can generate inflation pressure, as firms bid up wages to attract and retain talent.

U.S. wage rates in May rose 2.7% (at an annual rate), compared to 2.6% in April and 2.5% in 2017. This is consistent with anecdotal evidence collected by the Fed indicating that inflation pressures are mounting in much of the country. According to the Fed’s Beige Book, firms are having increasing difficulty “filling positions across skill levels.”

The Fed policymakers meet again June 12-13, and it is likely they will continue to remove stimulus from the system, hiking overnight rates another 25 basis points to a range of 1.75%-to-2.0%. By the end of next year, the key overnight rate could be as high as 3.25%-to-3.5%, the level the Fed estimates to be neutral for the economy.

Short-term market rates in the U.S. increased this morning immediately following the release of the employment report.

Canadian interest rates do not move in lockstep with the U.S., but the Bank of Canada already signalled this week that it would likely hike its target overnight rate when it meets again in July.

Mortgage rates in Canada have already increased considerably as the 5-year government of Canada bond yield, at just over 2.1%, is up 1.15 percentage points over the past year. Put another way, the 5-year government of Canada bond yield was a mere 0.95% on June 1, 2017, and over the past year, it has risen by more than 120%.

With the Fed and the Bank of Canada continuing to hike interest rates, it is very likely that mortgage rates will continue to rise in both Canada and the U.S.

1 Jun

Bank of Canada keeps key interest rate target on hold at 1.25 per cent


Posted by: John Dunford

OTTAWA _ The Bank of Canada kept its key interest rate target on hold Wednesday, but hinted that rate hikes could be coming as it noted the Canadian economy was a little stronger than expected in the first quarter.

The central bank held its target for the overnight rate _ a key financial benchmark that influences the prime lending rates at the country’s big banks _ steady at 1.25 per cent.

“Exports of goods were more robust than forecast and data on imports of machinery and equipment suggest continued recovery in investment,” the Bank of Canada said in a statement.

“Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.”

The central bank also said global economic activity remains broadly on track, but added that ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies.

It noted that recent developments have reinforced its view that higher rates will be warranted to keep inflation near its target, but added that it will take a gradual approach and be guided by the economic data.

“In particular, the bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity,” it said.

Economists had predicted the Bank of Canada would keep its key rate on hold Wednesday, but many have suggested the rate may be headed higher later this year.

The central bank’s decision to keep its trend-setting rate on hold came as inflation sits above the two per cent midpoint of its target range of one to three per cent and core inflation has crept past the two per cent mark for the first time since 2012.

It noted that inflation will likely be a bit higher in the near term than was forecast in its April monetary policy report due to recent increases in gasoline prices, but that it will look through the transitory impact of the fluctuations at the pump.

The central bank has raised its key rate three times since last summer, increases that have prompted the big Canadian banks to raise their prime rates which are used to set the rates charged for variable-rate mortgages and other variable-rate loans.

Its next scheduled interest rate decision is set for July 11 when it will also update its outlook for the economy and inflation in its monetary policy report.