September 24, 2020

Canadians’ debt no reason for rate hike – bank

OTTAWA | Wed May 9, 2012

May 9 (Reuters) – One of the key reasons for the Bank of Canada to raise interest rates – rapid growth in household credit – has disappeared, with household credit now rising at the slowest pace since 2002, a Canadian bank economist said in a report on Wednesday.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” said Benjamin Tal, senior economist at CIBC.

Tal suggests the housing market is starting to cool and predicts a 10 percent drop in prices over the next year or two. His analysis comes a day after data showing a surge in April housing starts fueled concerns about a possible housing bubble.

Tal said household credit is now rising by just over 5 percent year-on-year, the slowest rate since 2002, and by only 0.4 percent month-over month when looked at as a six-month moving average.

The central bank has repeatedly flagged household debt as the single biggest domestic risk to the economy. It has frozen its overnight target rate at an ultra-low 1 percent since September 2010 but since mid-April has been more hawkish, saying it may become appropriate to withdraw some stimulus.

Canada’s primary dealers, polled by Reuters on April 17, expected the next rate hike to be in the first quarter of 2013. Markets are pricing in a chance of an increase toward the end of this year.

Tal said consumer credit is also rising at the slowest monthly pace since the early 1990s, mainly because Canadians are using their credit cards less or transferring card balances to lines of credit, which often have lower interest rates.

“Households should get credit not only for notably slowing the pace at which they accumulate debt in an environment of historically low interest rates, but also for managing their debt in the most optimal way on record,” said Tal.

Growth in mortgages is also showing signs of slowing, with mortgages outstanding as of March up 6.3 percent from a year earlier, well below the average 7.3 percent rate of the past two years. The mortgage arrears rate is just under 0.4 percent, still above pre-recession levels but down from the near 0.5 percent rate during the recession.

“As for the housing market, there is no debate about the fact that the market is overshooting. The only question is what will be the nature of the adjustment,” he said.

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