Remarks last week by Bank of Canada Governor Stephen Poloz and his senior deputy, Carolyn Wilkins (see earlier post, Loonie turns on a dime), led a number of analysts to conclude that the start of a policy tightening cycle in Canada might be closer than anyone had previously thought. Both officials noted the broadening strength in the economy, with Poloz specifically stating that the Bank's rate cuts had "done their job".
Well, maybe so, but May CPI data released by Statistics Canada today suggest the Bank still has plenty of room for manoeuvre. Headline CPI rose just 1.3 percent year-on-year in the month, down from 1.6 percent in April. Food and energy prices, always subject to volatility, heavily influenced the headline number, but the various core measures introduced by StatsCan last year all tell a similar story: consumer inflation is well below the Bank's 2 percent target, and showing no real sign of moving up any time soon. It would be surprising and indeed unprecedented for the Bank to initiate a tightening cycle under these circumstances; the likely timing for the first rate move is still the first half of 2018.
Meantime, there are growing signs that the real estate market in the Toronto area, a major concern for the Bank (not to mention the IMF and the OECD) has hit a brick wall. Data for the first half of June show a further fall in selling prices, a rise in the number of homes listed and a fall in actual transactions. Realtors are trying to put a brave face on the data, describing June as "normally a quiet month", but there seems to be more than that happening.
Reports are starting to surface of buyers whose offers were accepted before the correction began (in late April) discovering that their mortgage providers are now assessing the properties at a lower than expected value, and reducing their loans accordingly. This is starting to raise the possibility of supposedly agreed transactions collapsing in a flurry of foregone deposits and acrimony. It's no surprise that buyers are increasingly taking a wait-and-see attitude, in the hope that the market will come to them. An outright collapse in prices is still unlikely because of Toronto's underlying demographics. However, those realtors who confidently claimed that the slowdown would be brief look increasingly likely to be proved wrong.
All good news for the Bank of Canada and the underlying economy then, right? Well, yes, but then there's this. It seems that consumers are still enthusiastically building up their debts: the average household now owes more than $22,000 in addition to its mortgage debt. Delinquency rates and other signs of distress remain comfortingly low, but that's hardly surprising with interest rates at today's levels. It's perhaps just as well that the Bank of Canada has room to postpone any tightening steps for a few months more, because it's not at all clear how households, and by extension the overall economy, will react once rates finally start to edge higher.
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