Canada Consumer Debt, Housing Worries Ease Modestly -- Update
By Kim Mackrael
OTTAWA -- Worries about high consumer debt and frothy housing markets eased modestly over the past year as higher interest rates and tougher mortgage rules helped cool the pace of borrowing, the Bank of Canada said Thursday.
The central bank's annual Financial System Review said housing resales and price growth slowed significantly in the Canadian cities of Toronto and Vancouver over the past two years. Household borrowing also slowed, with more people delaying house purchases or choosing less expensive homes, and the quality of new mortgage lending improved.
"These are encouraging signs, but there are important reasons for continued vigilance," Bank of Canada Governor Stephen Poloz said in a press conference on Thursday. He said the overall level of consumer debt remains high with a large portion of debt held by highly indebted households.
At the same time, risk to the financial system increased slightly from last year because of a slowdown in economic growth, Mr. Poloz said. He said he anticipates risks will recede in the coming months as economic growth picks up.
"We would judge that to be temporary," Mr. Poloz said. "As we go through the second half of the year, we should see increasing evidence that growth is returning to a trend line."
After raising its benchmark overnight interest rate five times between mid-2017 and last October, to 1.75%, the central bank recently pushed the pause button on rate increases. The bank expects growth to remain slow through the first half of this year in the face of energy-sector struggles and global trade conflicts.
The Bank of Canada's annual review assesses vulnerabilities in the financial system and identifies potential risks to financial stability. It was last published in June 2018.
TD Bank economist Brian DePratto said the financial-system review is a reminder of why the Bank of Canada is likely to remain cautious on future rate decisions. "Threading the needle between keeping economic growth [and inflation] on track and avoiding a return of rapid household debt growth suggests monetary-policy stasis for some time to come," he said.
The central bank said elevated levels of household debt and housing-market imbalances remain top vulnerabilities in the Canadian financial system. Cyber threats are another important concern, the bank said Thursday, because an attack could spread across the country's interconnected financial institutions.
The Bank of Canada also flagged concerns over rising corporate debt, particularly among firms with lower credit ratings. The ratio of nonfinancial corporate debt to income was 315% in 2018, a level the central bank said is well above the historical average.
The central bank for the first time listed climate change as a significant vulnerability in the financial system. It said climate change-related risks include disruptive weather events and transition risks associated with adapting to a lower-carbon global economy.
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