OTTAWA — The Bank of Canada says the country’s economic positives have largely offset the negatives, a balance that led governor Stephen Poloz to maintain the trend-setting interest rate Wednesday at one per cent.
On the plus side, the central bank pointed to an increase in exports thanks to an improved U.S. economy — a boost that has also led to more business investment and jobs in Canada.
But it also warned of lurking threats: sliding oil prices and high household debt. That indebtedness, it cautioned, presents a “significant risk to financial stability.”
Still, even though the bank sees balance in the risks, it acknowledged sunnier data on Canada’s recent economic performance indicates the country is emerging from the darkness.
“Canada’s economy is showing signs of a broadening recovery,” the bank said in the statement that accompanied the rate announcement.
“Stronger exports are beginning to be reflected in increased business investment and employment. This suggests that the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun.”
Several economists say the bank’s slightly more-serious tone about household imbalances, or debt, caught their attention.
Michael Gregory, deputy chief economist for BMO Capital Markets, said consumer spending has remained strong in Canada and the housing market has proven to be much more resilient in some regions.
“Before these were risks that were edging up and now I guess they’ve edged up to the point that they have become ‘significant,’ ” said Gregory.
A separate report released Wednesday by a consumer credit rating agency Equifax Canada found the collective debt of Canadians was up 7.4 per cent from a year ago — to more than $1.5 trillion.
Nearly two-thirds of it, or $985.1 billion, is mortgage debt. Excluding mortgages, Equifax said Canadians owed an average of $20,891.
National Bank senior economist Krishen Rangasamy agreed the bank’s stronger warning on the household debt differs from its last interest-rate announcement, in October.
But Rangasamy doesn’t think it means Poloz is looking to raise interest rates in the near future.
Perhaps, he added, it’s a veiled plea to Ottawa to introduce new measures aimed at curbing debt accumulation.
“I think the Bank of Canada is trying to reach out to the federal government and say, ‘You know what, this is significant risk and maybe you should do something about it,’ ” said Rangasamy, who pointed to past steps taken by the Conservative government to tighten rules on mortgage down payments.
“(The Bank of Canada) didn’t say it explicitly in the statement, but I think by saying that financial stability risks are significant in Canada, it’s basically calling for help from Ottawa.”
Rangasamy said the bank doesn’t want to raise interest rates just yet out of concern that doing so might slow the economy’s healing process.
“It also wants to keep the Canadian dollar weak, and by not raising interest rates, this is exactly what’s going to happen,” he said.
The key policy rate hasn’t budged since September 2010 and has helped keep borrowing rates at historic lows. Economists expect the rate to stay where it is until at least mid or late 2015.
Evidence of an improving economy has appeared in the data since the central bank’s last interest-rate announcement in October. At the time, it called underlying inflationary pressures “muted” and said the inflation projection was “roughly balanced.”
Since then, the unemployment rate dipped to 6.5 per cent and the pace of GDP growth climbed to 2.8 per cent in the third quarter — half-a-percentage-point higher than the bank had expected.
Fresh figures have also pointed to a faster-than-anticipated growth for inflation.
The bank acknowledged Wednesday that inflation had climbed faster than expected, but it described the increase as “temporary effects” of a lower Canadian dollar and price jumps in certain consumer sectors, such as telecommunications and meat.
It also said the output gap appeared to be smaller than it had predicted in its October monetary policy report. The bank noted, though, that there was still significant slack in the economy.
In addition to household debt, the announcement listed weaker oil prices as a downside risk to inflation.
In October, Poloz warned if the low oil prices lingered at depressed levels they could cut the growth of Canada’s GDP by a quarter-point next year.
After making the remarks to the Senate banking committee, Poloz noted the central bank had used a price of US$85 a barrel to produce its estimate. Since then, the price of oil has dropped below US$70.
Jimmy Jean, a senior economist with Desjardins Capital Markets, had expected the Bank of Canada to be more insistent Wednesday about the threat of plunging oil prices on the Canadian economy.
“It doesn’t seem that, on net, they see (falling oil prices) as having a very large negative impact — at least that was not what came out of the statement,” Jean said.
“The statement did not come off as overly alarmed.”
Waterloo Region Record
By Andy Blatchford
The Canadian Press