Canada's Housing Bubble

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Carney enters crucial phase for recovery Print E-mail

Jan 17, 2010 Jeremy Torobin Globe and Mail

No change in interest rates expected but ‘we've got this confluence of events that may inform us quite substantially in terms of where things are going'

Bank of Canada Governor Mark Carney is entering a crucial phase for clinching the recovery.
Having helped steer Canada's economy out of recession, Mr. Carney and policy makers across the globe are carefully watching for signs that their economies are healing and trying to determine the right moment, and the right pace, at which to start withdrawing the unprecedented stimulus that helped counter the effects of the financial crisis.

While few believe there's much chance Mr. Carney will abandon his “conditional” commitment to keep borrowing costs at a record-low 0.25 per cent through the middle of the year or longer, every piece of economic data over the next few months will be parsed for indications of how quickly rates might rise in the second half of the year and beyond.

Timing is particularly important because no central banker wants a repeat of 1937, when the U.S. Federal Reserve tightened prematurely, snuffing out a tentative recovery and thus prolonging and worsening the Great Depression.

No economist believes the central bank chief is going to adjust borrowing costs Tuesday, and few contend he should be rushing to so much as tweak the wording of the pledge to leave rates where they are unless the inflation outlook changes.

But six months before a July decision which could mark the first rate hike since the crisis, a quarterly economic and inflation forecast this Thursday may offer clues about whether Mr. Carney thinks the recent rebound is here to stay, and how quickly the economy might return to something resembling pre-recession form.

And data on consumer prices this week from Statistics Canada could suggest whether there's any possibility he will need to shorten or extend his holding pattern, the length of which depends on how soon he sees inflation returning to his 2-per-cent target.

“We've got this confluence of events that may inform us quite substantially in terms of where things are going,” Eric Lascelles, a strategist at TD Securities in Toronto, said in an interview.

“There is still a great deal of debate over the velocity of the recovery and whether we race our way back to normal in a very short period of time or slowly work our way back over a longer span,” he said. “The Bank of Canada has generally had a very middle-of-the-road view, and it will be very curious to see if they shift that up or down.”

Since the bank's last forecast in October, the country's companies have started hiring again and a buying spree in the home resale market, fuelled in part by rock-bottom borrowing costs, forced Mr. Carney to repeatedly insist there is no housing bubble, while also warning that some Canadians are taking on debt they won't be able to afford when rates start to climb.

At the same time, even as domestic demand firms up, economic growth numbers have been tepid – 0.4 per cent in the third quarter, as opposed to Mr. Carney's October estimate of 2 per cent – because the strong dollar is making it that much harder for exporters to sell their goods in the badly damaged U.S. market. Policy makers in October predicted the economy would expand at an annual rate of 3.3 per cent in the final three months of 2009 and 3.8 per cent in each of the first two quarters of this year.

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