Bank of Canada stays neutral, frets over household debt

The Bank of Canada building is pictured in Ottawa in this file photo taken July 19, 2011....

The Bank of Canada building is pictured in Ottawa in this file photo taken July 19, 2011. (REUTERS/Chris Wattie/Files)

Randall Palmer and David Ljunggren, Reuters

, Last Updated: 9:27 AM ET

OTTAWA - The Bank of Canada reiterated its explicitly neutral stance and kept its overnight interest rate at 1 percent on Wednesday, but highlighted new concern over the overstretched household sector.

"Overall, the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished," it stated.

It dropped previous references to the constructive evolution of household imbalances and to a soft landing for the housing market and said "activity in the housing market has been stronger than anticipated."

Yet it was sanguine about inflation, which peaked at a 28-month high of 2.4 percent in June, saying recent data reinforced the view that higher inflation had been attributable to temporary effects "rather than to any change in domestic economic fundamentals."

Canadian economic growth in the second quarter was almost exactly as forecast, it said, as exports surged with the support of stronger U.S. investment spending and the past depreciation of the Canadian dollar. An increasing number of export sectors appeared to be turning the corner toward recovery, it said.

The overnight rate has been at 1 percent since Sept 8, 2010.

"The bank remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks," it said.

Governor Stephen Poloz last year dropped the tightening bias of his predecessor, Mark Carney, and in July directly inserted language into the statement saying the bank was neutral.

Virtually no one believes there is a 50 percent chance of a rate cut, however. A Reuters survey of 39 economists taken before Wednesday's statement unanimously forecast that the next move would be up.

The central bank and finance ministry had long voiced concern about the amount of debt households had taken on, saying that when mortgage rates eventually do rise some Canadians could have trouble. But they had also recognized a tapering off of indebtedness.

The ratio of Canadian household debt to income fell to 163.2 percent in the first quarter from 163.9 percent in the fourth quarter of 2013, and a record high 164.1 percent in the third quarter of 2013, Statistics Canada reported on June 19.


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