Bank of Canada: can't move, won't move

As expected, the Bank of Canada kept its interest rate target unchanged at 0.5 percent today.  The press release  (which, as one commentator has noted, is unusually short) depicts an economy still facing uncertainty from global developments, especially in the United States.  Low interest rates are supporting steady growth in consumer spending and the housing sector, and there are some signs of an improvement in business investment.  Inflation -- both headline CPI and the Bank's three core measures -- remains well-contained.

Given these facts, it's no surprise that the Bank's Governing Council "judges that the current degree of monetary stimulus is appropriate at present".  And likely not just "at present": the timetable for any removal of stimulus continues to be pushed further into the future, even though this implies that the divergence between the Bank's policy stance and that of the Federal Reserve will continue to widen.

Meanwhile, back in the housing market....It's too soon to tell whether recent actions by the Ontario government will help to cool the buying frenzy in the Toronto area, though there are some early signs that the bidding wars have eased.  However, the overhang of household debt continues to loom ominously.  Manulife is the latest institution to weigh in, as reported here.

Much of this is familiar, but there's one startling statistic: 72 percent of mortgage holders could not absorb a 10 percent increase in their monthly mortgage costs without running into financial problems. Indeed, 38 percent would be in trouble with a 5 percent increase!  Think about that.   Rates have been so low for so long that most of those people are probably paying something near a 3 percent mortgage rate. That means that just one 25 basis point increase would be enough to push a sizable number of homeowners into financial distress.

That certainly shows why the Bank of Canada will need to be cautious when it does start to tighten its policy settings.  But it also begs the question: just why has the Bank allowed this situation to develop, and just how does it think it can get out of it without torpedoing the entire economy?

The Bank's next policy decision, due on July 12, will be accompanied by an updated Monetary Policy Report.  This will doubtless provide a detailed review of the economic outlook, but it is very unlikely to provide any clear pathway for the Bank to extricate itself from the low-rate trap it has created for itself.