Canada Indebtedness to Limit Rate-Increase Room, Economists Say

(Bloomberg) 

Bank of Canada Governor Stephen Poloz could pause monetary tightening this year over concerns about the impact of higher interest rates for consumers holding record debts, according to a group of economists at the Bloomberg Canadian Fixed Income Conference.

While policy makers signaled their “tightening bias” before lifting the overnight rate to 1 percent from 0.5 percent in July and September moves, the last statement’s most important line was a reference to consumer sensitivity, David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, said Tuesday in New York.

“They have I still think a tightening bias on the books, so maybe they move one more time,” Rosenberg said. “I don’t think they are going to move more than that, and it’s not even clear to me that they necessarily move another time.”

Poloz has moved to cool the fastest growth in the Group of Seven’s economies that has taken output and the job market near its full potential and may spark inflation beyond the central bank’s 2 percent target. While all three economists on the panel said the housing boom will end without a crash, there’s little precedent to show what happens to confidence and spending when consumers see higher payments on their record C$2.1 trillion ($1.7 trillion) debt pile.

“The Bank of Canada needs to continue in a gradual hiking cycle, and I think this is going to be very important for the stability of the Canadian economy,” said Carlos Capistran, an economist at Bank of America Merrill Lynch. “If the Bank of Canada hikes too fast and financial conditions tighten too much, then the risk of these highly leveraged households going through a crisis is high.”

Rate Hikes

Capistran predicted no more rate increases for the rest of the year, and three hikes in 2018.

National Bank of Canada Chief Executive Officer Louis Vachon said the path to higher rates will only be opened after the economy shows further signs of progress. “From now on, it will require strong evidence of continued job creation and eventually also some clear evidence of tightening in capacity which could lead at some point to a bit more inflationary pressure than we’ve seen,” he said at the conference.

Poloz is due to deliver a speech Wednesday, titled “The Meaning of ‘Data Dependence’: An Economic Progress Report,” which will be his first major remarks since a July press conference. That will allow him to address the second-quarter gross domestic product report that showed a 4.5 percent annualized pace.

Canada’s recovery remains at risk from the lopsided contribution made by consumers and housing, said Millan Mulraine, chief economist at Ontario Teachers’ Pension Plan Board.

“If you start raising rates and you are right and we have another 75 basis points in tightening, I think from a cyclical perspective that can cause some damage to the Canadian economy, and that’s my big worry,” Mulraine said.

Nobel Winner

Rosenberg, who forecast the U.S. housing crash when he worked for Merrill Lynch, said the economy in the long run will be bolstered by a shift from energy production to technology. The industry is the fastest-growing part of Canada’s economy with year-over-year growth around 7 percent and the cluster southwest of Toronto will likely produce a Nobel Prize-winning physicist in the next decade, he said.

Poloz “followed the script” with his rate cuts, Rosenberg said. “I’m quite optimistic on Canadian growth prospects long term.”