Canada is currently facing concerns on household debt, experts urge Bank of Canada to increase interest rates to address imbalances in the market.
Canada to Tighten Interest Rates
Canada’s low interest rates are causing risky market behaviors and the way to get out of such situation is to tighten the rates offered. An economist at Bank of America in New York wrote in a research report that Canada is headed for a risk of a financial crisis given the credit reduction of six Canadian banks and due to mortgage troubles.
The pressure builds on Bank of Canada to increase the interest rates. Since 2009, it has kept to its promise of retaining the policy rate at or below 1% as the country is struggling for traction ever since the global financial tragedy happened.
Even the debt-to-income ratio has increased to 167%, a real indicator that the country is vulnerable to debt and this is where the urge stems from.
High Probability of a Housing Bust
With the recent data release of Canada on wholesale sales and consumer spending, records reveal that a total of $7.0 billion in value was issued for building permits last March. It was also evident that Canada’s NHPI (new housing price index) continue to lean higher since 2009. Recent data show that the NHPI recorded for January grew by 0.2% to 100.7.
There is a more or less 30 percent chance of a housing bust (a 5 percent or more decrease annually). There is an excess compared to the demand of housing throughout the country.
According to reports, the imbalance could worsen and lead to bust of the economy sooner or later. Based on a recent research conducted, Canada ranks second to having the most overrated houses among the Group of 10 (a.k.a. G10 Countries that confer and collaborate with each other regarding economic, monetary and financial matters).
Higher Rates Can Save the Economy
It is true that allowing low rates to stay would just promote excessive borrowing and would definitely leave the economy defenseless and susceptible if the house prices dipped. It is risky to the financial stability of the country. Even the head of Canada and Mexico economics at Bank of America Merrill Lynch, further states that the way you trim down credit escalation is by placing higher interest rates and this would solve the problem eventually.
It would be painful at first when the implementation transpires; however, it is the only identified solution to stop leverage from increasing.
Adjust the Interest Rates during Times of Economic Uncertainty
Back in 2015, the Bank of Canada was the first to cut its interest rates as an answer to dropping oil prices (wherein Canada is the largest oil exporter to United States) and to stabilize the effects of inflation and other contributing factors. On its overnight loans, the bank cut its rate to 0.75%. The last cut recorded was in April 2009.
Experts claim that when interest rates are kept at a low, then Canada is setting its own problems in the long run.
The housing market and debt concerns are immediate issues that Canada need to deal with to keep its economy in good shape. To avoid worsening of risks which may further lead to a crisis, the Bank of Canada certainly needs to increase its rates to help control credit growth this year. Marking an increase would be the best measure to address market imbalances.
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