The BoC says the Trudeau government’s measures to cool hot housing markets in Vancouver and Toronto will help reduce risks to the financial system.
“We are mindful that low interest rates can lead to a buildup in financial vulnerabilities,” Carolyn Wilkins, BoC senior deputy governor, said in a speech at the Université du Québec à Trois-Rivières on Thursday.
“As part of our financial stability mandate, we are monitoring very closely the high level of household indebtedness and housing sector activity. We think that, over time, the measures announced by the federal government on Monday will help mitigate risks to the financial system posed by household imbalances,” she said.
Finance Minister Bill Morneau on Monday said the federal government will bring in a more rigorous mortgage-rate stress test for all insured borrowers, effectively shutting more people out of the market for mortgages. The government will also apply the tax rules so that only people who were living in their home as a principal residence before the home was sold are eligible to claim the principal residence exemption for capital gains.
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Rising home values in Toronto and Vancouver comes as the Canadian economy is undergoing complex adjustments following the drop in oil prices over the past two years, and amid an aging population and modest productivity growth.
“The adjustments are clearly under way,” Wilkins said. “There has been progress but also a few setbacks.”
Wilkins discussed how BoC of Canada policymakers analyze the economic situation as they set policy to achieve the bank’s 2% inflation target. She said governing council members are following three economic adjustments ahead of the October 19 policy rate announcement and monetary policy report release: stabilization in the energy sector, sustained pickup in non-commodity exports and sustained growth in the rest of the economy.
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“Progress has been made with respect to the adjustments I have just described, but there is still material slack in the economy,” she says. “Governing council looks forward to providing an update on our outlook, as well as an interest rate announcement, in a couple of weeks.”
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