Current Market Trends

Bank of Canada backs off housing bubble talk

Tuesday, January 19, 2010

Raising interest rates could hurt entire economy
CBC News
The Bank of Canada backed away Monday from its recent warnings about a real estate bubble in Canada.

In a speech in Edmonton, bank official David Wolf ruled out increasing interest rates to discourage mortgage lending.

The Bank of Canada says it sees the housing market 'requiring vigilance, not alarm.' (CBC)

Wolf, an adviser to bank governor Mark Carney, said that in the central bank's view it is premature to be talking about a housing bubble in Canada.

"We see the housing market requiring vigilance, not alarm," he said.

He added that even if the bank was convinced housing prices were getting out of hand, raising interest rates would be too blunt an instrument, since it would mean cooling off all economic activity.

"We would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession," he said in a speech delivered on behalf of deputy governor Timothy Lane, who could not travel to the Alberta capital for personal reasons.

"As a result, it would take longer for economic growth to return to potential and for inflation to get back to target," he added.

Wolf said the bank considers the current hot market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates. Moreover, he noted with starts below long-term demographic requirements, the number of houses on the market is still declining

With files from The Canadian Press






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