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Bank of Canada says economy can handle higher rates despite household debt risks

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High household debt and elevated housing prices have become bigger vulnerabilities in the past year, but the economy can still handle the rising interest rates needed to tame inflation, Bank of Canada governor Tiff Macklem said Thursday.

“We think the economy needs higher interest rates, and it can certainly handle higher interest rates,” he told a news conference in Ottawa discussing the central bank’s latest financial system review.

The review notes high debts and home prices have increased the downside risks to overall economic growth, as rising rates meant to counter inflation increase the chance of households having to divert consumption towards debt repayments.

However, Macklem emphasized the overall financial health of Canadian households, as the average net worth increased by about $230,000 during the pandemic, and the focus of the central bank on reducing inflation over concerns of how higher rates may affect the housing market.

“Our primary focus is getting inflation back to target. You know, monetary policy is not housing policy,” he said.

“The increases in housing prices we’ve seen have been unsustainably elevated and we are expecting to see some moderation in housing activity and frankly, that would be healthy.”

He said that while the housing market is an important part of the economy, and the bank is watching the dynamics closely, the bank needs to slow demand in the economy and bring it in line with supply.

The bank has indicated, and Macklem repeated Thursday, that it may have to move its key interest rate to upwards of three per cent to bring inflation back on target. He said the bank may need to “move more quickly, may need to take a larger step” to avoid inflation becoming entrenched.

The Bank of Canada raised its key interest rate target by half a percentage point last week to 1.5 per cent, a move that prompted the big commercial banks to raise their prime rates.

The report Thursday noted that increasing rates will put strain on mortgage holders, especially those who bought into the housing market during the pandemic as an increasing number of households have stretched themselves financially to purchase a home.

To illustrate the risks, the central bank ran a hypothetical scenario where five-year variable- and fixed-rate mortgages taken out in 2020 and 2021 renewed at median rates of 4.4 per cent and 4.5 per cent, respectively, in 2025 and 2026.

In this scenario, households that took out a fixed-rate mortgage during that period would see a median increase in their monthly payment of $300 or 24 per cent, while high loan-to-income ratio borrowers with a fixed-rate loan would see a median increase of $490 or 26 per cent.

However, those with variable-rate mortgages would face even larger increases with a median increase of $720 or 44 per cent in their monthly payment at renewal. High loan-to-income ratio borrowers who opted for a variable-rate loan would see a median increase of $1,020 or 45 per cent in their monthly payment.

Higher mortgage servicing costs mean less money to spend elsewhere which could have a negative hit on the overall economy, the report noted. Looking ahead to the first quarter of 2024, the trends have increased the probability of negative growth to 15 per cent, up by five percentage points compared to what it would have been had debt levels not changed during the pandemic.

Rising rates also increase the risk of a correction in the real estate market, which would erode equity and the ability for households to respond.

The report notes that the recent run-up in home prices, which gained about 50 per cent in the first two years of the pandemic, has been fuelled in part by increased buying by investors and the overall expectation that prices would continue to rise, both of which could “amplify” the decline in prices as the market reverses.

The real estate market has already started to cool since the bank has started raising its key rate, but the central bank said it’s too early to tell if it’s the start of a deeper, lasting decline.

The financial review noted that Canada’s banking industry could weather a downturn in both the housing market and overall economy. A stress-test where the economy declines 5.8 per cent over six quarters showed that while it would lead to sizable decline on bank capital buffers, the banks would still be broadly resilient.

The Bank of Canada noted in its review that other vulnerabilities to the financial system include cyber threats given the interconnected nature of the financial system, a risk that has increased from Russian aggression related to its invasion of Ukraine.

It said Russia’s invasion of Ukraine has also further complicated the transition to a low-carbon economy and increased the risks of a repricing of assets exposed to climate change.

But the key challenge for the bank remains high inflation rates, which Macklem said the bank hopes to reduce without pushing the economy into a recession despite the increased complexity of the challenges.

“Our objective is very much to to achieve a soft landing with inflation coming back to target, but it is going to be delicate and there are risks around that.”

This report by The Canadian Press was first published June 9, 2022.

Ian Bickis, The Canadian Press

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COVID-19

Effect of pandemic border restrictions could be long-lasting: Critics

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BANFF, Alta. — The last of Canada’s COVID-19 border restrictions are set to disappear at the end of this month, but some critics say they fear the measures have already caused a lasting decrease in cross-border travel.

At the Global Business Forum in Banff, Alta. on Friday, prominent voices who have been arguing for months in favour of the lifting of restrictions such as mandatory vaccinations, testing and quarantine requirements for international visitors said they’re now worried the economic impacts of such measures could be permanent.

In a panel discussion at what is an annual conference for business leaders in Canada’s most-visited national park, Meredith Lilly – an associate professor at Carleton University and a former international trade advisor to Prime Minister Stephen Harper – said cross-border day trips by Canadians to the U.S. never fully recovered after the terrorist attacks of Sept. 11, 2001.

She said her research has showed part of that is due to the heightened U.S. border controls put in place after that event.

“Fewer Canadians travelled to the United States to shop or fill up their tank of gas because of the unfriendly border,” Lilly said.

“Canada is now doing the same thing to Americans. So it’s going to take major effort to get Americans to come back.”

Earlier this week, federal government sources confirmed the cabinet order maintaining COVID-19 border measures will not be renewed when it expires on Sept. 30.

The change means international travellers will no longer have to prove they are fully vaccinated against COVID-19. Under the current rule, Canadians returning to the country who aren’t vaccinated must show a negative COVID-19 test result before arriving, and undergo further testing after arrival. They also must quarantine for 14 days.

The expiry also spells the end of insisting travellers use the ArriveCan app to input their vaccine status and test results, though the app will live on as an optional tool for customs and immigration.

But Lilly said the two-and-a-half years that pandemic-related border rules were in place was likely long enough to change the habits of some Americans, who will now no longer consider visiting Canada in the future.

Statistics Canada reported Friday that the number of international arrivals to this country increased in July even as they remain well below pre-pandemic levels.

The agency said the number of trips by U.S. residents in July was 2.2 million, 11 times the number of trips taken in July 2021, but still about 60 per cent of the trips reported in July 2019.

“So the picture still isn’t great,” Lilly said. “And three years is a long time for people to permanently change their behaviour.”

Canadian Chamber of Commerce president and CEO Perrin Beatty, who also spoke in Banff Friday, said this country’s tourism industry has now missed out on two summer seasons.

He said multiple medical experts have argued that testing asymptomatic travellers for COVID-19 at the border is far less effective than testing symptomatic Canadians within their communities.

“We’ve maintained these restrictions that simply make no sense. The cost to us, for small businesses in every part of this country, of the friction that we’ve put on at the border has been billions of dollars,” Beatty said.

“And we’re out of step with other countries around the world, we’re out of step with the science, and we’re out of step with the rest of Canadian society because of these self-inflicted wounds we’ve put on ourselves.”

A report released by the Canadian Travel and Tourism Roundtable on Friday aimed to assess the impact and effectiveness of border measures and other travel restrictions implemented by the federal government to slow the spread of COVID-19.

The report, which was authored by four Canadian doctors specializing in infectious diseases, emergency medicine and pandemic management, concluded border measures have been largely ineffective at preventing new COVID-19 variants from entering the country.

It also said there is no convincing evidence that pre-departure and on-arrival testing and surveillance have had a significant impact on local transmission in Canadian communities.

The expiry of the cabinet order on Sept. 30 doesn’t deal with whether passengers must wear masks on domestic and international trains and planes because that rule is contained in a separate order issued by the minister of transport.

The tourism industry has argued masking on planes is also “inconsistent” from a policy perspective, given that the high air exchange rates on passenger aircraft make them one of the safest ways to travel from a COVID-19 perspective.

“But the government of Canada is saying the single most dangerous thing you can be doing is travelling by air,” Beatty said.

This report by The Canadian Press was first published Sept. 23, 2022.

Amanda Stephenson, The Canadian Press

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Business

Former BoC governor Stephen Poloz warns against entrenching inflation in expectations

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BANFF, Alta. — Preventing current high inflation levels from becoming embedded into the public’s expectations is key if the country is to avoid falling into recession, former Bank of Canada governor Stephen Poloz said Thursday.

Poloz, who was head of the bank for seven years until his term expired in June of 2020, made the comments during an interview in Banff, Alta., where he was a speaker at the Global Business Forum, an annual conference that attracts executives and business leaders from around the world.

Poloz said he believes the current cycle of high inflation is transitory, pointing to the latest monthly reading from Statistics Canada showing inflation is already beginning to ease — in spite of the fact, Poloz said, that interest rate hikes already implemented by central bankers have barely had time to have an effect.

“It means it (inflation) is going to go away more or less by itself in time. But if it takes one year for it to climb up, it has to take a full year for it to flatten and another full year for it to go away,” Poloz said.

He said it’s possible inflation could return to the Bank of Canada’s target rate of two per cent without a severe or even a mild recession. He pointed out the Canadian economy is in a strong position, with a strong labour market, high levels of income and household savings, and encouraging levels of corporate investment.

However, he also said there’s no guarantee of a soft landing. A major geopolitical event that causes a dramatic spike in the price of oil, for example, could cause a recession all on its own regardless of interest rates or any other factor.

Poloz said one of the biggest risks is actually the public’s expectations. If people become convinced that high inflation is here to stay, he said, that could lead to higher wage settlements that are difficult to reverse.

Spiralling wages in turn could drive inflation even higher, forcing the need for a more difficult economic contraction to get the cost of living under control.

“The risk is (inflation) infects our economy, it gets embedded and stays there, to some degree,” Poloz said. “Of course it would never be near 100 per cent, but it could be meaningful.”

Poloz said the fact that most Canadians no longer remember this country’s last period of high inflation, which occurred in the late 1970s and early 1980s, is a positive in that it makes it more likely they will view the current cycle as a short-term event.

Poloz’s hopeful tone Tuesday was a marked contrast to the message just one day prior from U.S. Federal Reserve Chair Jerome Powell.

Speaking at a news conference after the Fed announced a substantial rate hike of three-quarters of a percentage point, Powell acknowledged what many economists have been saying for months: That the Fed’s goal of engineering a “soft landing” — in which it would manage to slow growth enough to curb inflation but not so much as to cause a recession — looks increasingly unlikely.

 “No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Powell said, adding that before the Fed’s policymakers would consider halting rate hikes, they would have to see continued slow growth, a “modest” increase in unemployment and “clear evidence” that inflation is moving back down to their 2 per cent target.

“We have got to get inflation behind us,” Powell said. “I wish there were a painless way to do that. There isn’t.”

Earlier this month, the Bank of Canada  raised its own key interest rate by three-quarters of a percentage point and signalled this won’t be the last increase as it continues its battle against high inflation.

In Banff on Thursday, Poloz said no one truly knows what is going to happen as central bankers around the world look to downshift from an overheated economy.

“It’s like landing a plane in the fog,” Poloz said. “You won’t really know until you feel the wheels touch down, and you’re hoping it’s going to be soft.”

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 22, 2022.

Amanda Stephenson, The Canadian Press

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september, 2022

tue27sep10:00 am4:00 pmCACPC Annual SHRED Event10:00 am - 4:00 pm MST The Central Alberta Crime Prevention Centre, 4311-49 Ave Event Organized By: The Central Alberta Crime Prevention Centre

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