Bank of Canada: not just yet

As expected, the Bank of Canada left its target rate unchanged at 0.5 percent at today's Monetary Policy Committee meeting.  The statement presented by Deputy Governor Carolyn Wilkins is instructive: while the Bank acknowledges that economic data have been strong in recent months, it is not confident that the strength will last.  Specifically, it forecasts that after growing at a 3.8 percent rate in the first quarter of 2017, GDP will slow to about a 2 percent pace in the second half of the year and persist at that rate through 2018 and 2019.  This is only marginally above what the Bank now sees as the economy's underlying rate of growth (about 1.5 percent) and implies that any increase in the target rate is unlikely until well into next year.

The Bank acknowledges that consumption and housing activity has been stronger than expected -- near-free money at work -- and that the energy sector has rebounded.  However, it is concerned that export growth is sluggish, despite the favourable exchange rate, and that business investment is slack, despite strong corporate balance sheets and low borrowing costs.  It is the lack of momentum in those two key sectors that has convinced the Bank that the recent burst of GDP growth may not be sustained.

Speaking to reporters, both Ms Wilkins and Governor Stephen Poloz expressed concern over price trends in the Toronto housing market.  Poloz said it was perhaps time to remind people that "house prices can go down as well as up".  The latest data show that house prices in the Toronto area rose a startling 33 percent in the year to March.  Lack of supply, in the form of both sluggish new home construction and dwindling listings of existing properties, receives some of the blame for this. So does the rapid growth in the population of the Toronto region, running at upwards of 100,000 people per year. There is also concern over speculative buying, much of it possibly fuelled by foreign money.  The Ontario budget later this month is expected to include measures to slow the market, a prospect that fills the heart with foreboding.

Low supply, rising migration and speculation may all be in play, but it's undeniable that the Bank of Canada's ultra-low interest rate policy is the key driver.  Nobody knows how the market will react when the Bank does start raising rates, but given the indebtedness of Canadian households, it's unlikely to be pretty.  Based on today's statement, however, we are going to wait for many more months to find out.