Photo: James Bombales
The Canadian economy was off to a rough start in 2018, following the introduction of a new mortgage stress test on January 1, but according to the Bank of Canada, a rebound will likely occur this quarter.
On Monday, Bank of Canada Governor Stephen Poloz addressed the House of Commons Standing Committee on Finance about the bank’s recently published Monetary Policy Report.
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“All told, we expect that the economy will grow by two per cent this year, and at a rate slightly above its potential over the next three years, supported by both monetary and fiscal policies,” Poloz told the committee.
The central bank said the composition of growth over the next quarter will shift, with a larger contribution from business investment and exports and less from household spending.
Here are four key details from Poloz’s opening statement that illustrate how housing policies have played a role in economic growth so far this year, and what’s to come through the rest of 2018.
1. The mortgage stress test impacted growth in Q1 2018
According to Poloz, the implementation of the new stress test is one of the main culprits for slower-than-expected growth in the first quarter of the year.
“Housing markets reacted to announcements of new mortgage guidelines and other policy measures by pulling forward some transactions into the fourth quarter of last year,” said Poloz.
“That led to a slowdown in the first quarter that should naturally reverse,” he added.
2. Fewer exports also played a role in stunted growth
But it wasn’t just the mortgage stress test that slowed growth — weaker-than-expected exports during the first quarter of the year also contributed to limited growth. Poloz said this weakness was primarily caused by various transportation bottlenecks. But, some of this export weakness should also subside throughout the rest of 2018.
3. Interest rates will need to increase over time to keep inflation in check
If the bank’s forecast remains on track, Poloz said interest rates will need to rise over time to keep inflation in line. Although interest rates remain very low relative to historical experience, further rate hikes could put more pressure on housing markets, especially those that are dealing with skyrocketing home prices and eroding affordability.
With a number of external forces weighing on the economy, such as the uncertainty around trade conflicts and escalating geopolitical risks, Poloz said interest rates may need to remain below the neutral range until these uncertainties have dissipated. Throughout the coming months, the bank will continue to monitor the economy’s sensitivity to interest rate movements and will consider the appropriate pace of interest rate hikes based on a data-dependent process of risk management.
4. Risk to economy includes growing sensitivity to rate hikes
Going forward, one of the key sources of uncertainty around the outlook for inflation includes the economy’s increased sensitivity to higher interest rates, as household debt levels climb.
“The concern is that as interest rates rise, the share of household income going to service debt will also rise, leaving less to spend on other goods and services, and putting downward pressure on inflation,” said Poloz.
With the new mortgage regulations in effect, the bank said it will take time to assess this issue. But, Poloz added that household borrowing growth is easing, suggesting that consumers are starting to adjust to higher rates and stricter mortgage rules.