The Bank of Canada AGAIN issued a statement that announced ongoing rock bottom low interest rates, and AGAIN asked Canadians to be prudent in their borrowing and lending. Isn’t there an inherent contradiction in this statement? Aren’t Canadians naturally going to take advantage of free money? Aren’t some going to be imprudent? It seems that the BOC wants people to overextend with free money, but also wants to be able to later say that they warned against that. -vreaa
This from the BOC statement, a quoted at the G&M 10 Dec 2009 -
“Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates.”
“Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”
“[The] upward trend [in Canadian household debt as a share of personal disposable income] implies that households have a growing vulnerability to additional adverse shocks.” [such as rising interest rates? -ed.]
The BoC is so screwed.
They know there is a housing bubble, and they know it has to deflate at some point; they just want to make it happen as softly as possible and, above all, not get blamed when it happens.
They have already promised to not raise rates until June, so if they do it before then everyone will blame them if they raise rates now and it all goes to crap.
The request for banks to use caution and consider “household exposures when evaluating even an insured mortgage” is more of a plea. That would be like me selling cheaply made cars with 10 year warranties issued by someone else. Would I tell people that these cars probably wont last? Hell no because I get the profit from the sale and assume none of the risk of cars breaking.
The only thing I could see them doing is making the required down payment for a CMHC loan 10%, but that would also shatter the market. They pretty much have to sit around until June issuing warnings then jack the rate.
The BoC has nothing to gain and everything to lose from a housing bubble. Look at the Fed and its lack of credibility. The problem is the CMHC and the insane amount of mortgages they are backing, all at Harper’s bidding of course.
Carney can reign it in with interest rates, but that’s like using a sledgehammer. The effect is widespread and profound. This country still has a slight trade surplus which is very desirable in a deflationary environment. Higher interest rates would spike the dollar, nuke exports, and attract speculative foreign investment. It wouldn’t be healthy. Hopefully it’s not necessary. But I’m starting to think Carney might do it if its that or the bubble in 6 months.