Bank Of Canada Says Weak Housing Could Hit Economy

Posted on January 11/2011 by

Bank of Canada says weak housing could hit economy KINGSTON, Ontario (Reuters) - If the Canadian housing market were to weaken suddenly it could have a "sizable spillover" effect on other parts of the economy, a senior Bank of Canada official said on Monday. The comments by Deputy Governor Agathe Cote were the latest in a series of warnings by the central bank about the risks posed by high levels of household indebtedness. "On the downside, if there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption, given the high debt loads of some Canadian households," Cote said in a speech. The bank is concerned that near record-low interest rates -- designed to help cushion the worst of the recession -- are persuading Canadians to take on too much debt. It says this could have harmful consequences once rates rise. Cote said an economic downturn could be transmitted to the broader financial system through a weakening in the credit quality of loans to households. "This could prompt a tightening of credit conditions and, in turn, set off a mutually reinforcing deterioration of real activity and financial stability," she said. Separately, Statistics Canada data showed the value of Canadian building permits unexpectedly tumbled 11.2 percent in November from October. Cote said that while steps taken to curb household debt are starting to have an impact, credit continued to grow faster than income. "Without a significant change in behaviour, the proportion of households that would be susceptible to serious financial stress from negative income or wealth shocks will continue to grow," she said. A Reuters poll last week revealed most of Canada's primary securities dealers expect the Bank of Canada to resume raising interest rates sometime in the first half of this year. Cote repeated the bank's line that there is still considerable stimulus in place but otherwise gave few hints as to whether the bank would hike rates on January 18, its next policy announcement date. Canadian government officials say they are cautiously optimistic the economic recovery will continue, while sounding alarms about the challenge posed by the weak U.S. economy, the European debt crisis and a strong Canadian dollar. Separately, the bank said that according to its quarterly survey companies were optimistic about the next 12 months but many expect only modest growth, in part due to strong competition and moderate demand. In its fourth-quarter business outlook survey on Monday, the bank said 49 percent of companies expected to boost employment in the next 12 months, up from 39 percent in the third quarter survey.


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