Stephen Poloz

Bank of Canada Leaves Housing Bubbles Untouched

Steve Saretsky -

Bank of Canada Keeps Interest Rates Untouched Despite Growing Pessimism

Despite echoing concerns regarding an overheated housing market and a mountain of debt, the Bank of Canada held interest rates firm today at 0.5%. This has sparked a slough of criticism, from a plethora of economists. Including, most recently Carlos Capistran, head of economics at Bank of America.

“The way you reduce the pace of credit growth and eventually solve the problem of high leverage is by having higher rates, not by keeping rates low. It is painful for the economy when you start tightening but you have to do it at some point. Otherwise, leverage is going to keep increasing.”

Painful, indeed. A recent survey from Manulife highlights almost three quarters of Canadian homeowners would have difficulty paying their mortgage every month if their payments increased by as little as 10%. Even more concerning, 14% of respondents said they couldn’t afford any increase in their mortgage payments.

This comes at a time when household debt levels have never been higher, and interest rates have never been lower. A recipe for disaster, in which professor Steve Keen believes has set Canada up for a credit crisis before the year 2020. Which he talks about in his new book ‘Can we avoid another financial crisis?

This is something Krishen Rangasamy, senior economist at National Bank also noted a couple weeks ago. “By keeping interest rates low you are setting yourself for problems down the road. For example, financial stability risks, and that’s something that is very concerning to us.”

However, the Bank of Canada remains intent on sticking to it’s mandated 2% inflation rate, which is tracked by their questionable CPI model.  Yes, this is the same CPI model that shows owned housing only rose 2.1% in 2016.

Let’s face it, the Canadian economy is weak, and there’s never a good time to raise rates. But after nearly 10 years, this low interest rate experiment has done little to stimulate growth, but rather, has contributed to housing speculation while increasing an avalanche of debt, prone to a single snowflake toppling it over.

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