The Bank of Canada Deputy Governor, John Murray, was in British Columbia yesterday speaking to a group of mortgage brokers about a number of things affecting the Canadian economy. The two topics that Mr. Murray had at the forefront of his mind were inflation and interest rates; and he once again explained why the Bank of Canada hasn’t yet raised rates, and why Canadians need to be careful when taking on a second mortgage in the form of a HELOC or home equity loan.
First up for discussion was inflation and the bank’s goal to keep it at 2%. Mr. Murray explained that while this was mandate is low, it’s necessary to help with overall financial stability. The Deputy Governor pointed out while speaking on inflation that price stability and financial stability need to work hand and in hand and that it’s a myth that “focusing on price stability limits the Bank’s ability to pursue its other major objective, financial stability.” He continued on to say, “While at times there may appear to be tensions between these two objectives, the two are in fact inextricably linked; it is impossible to achieve one of them without maintaining the other.”
The Deputy Governor went on to say that price stability is the most important goal the Bank has in order to keep Canada’s economy afloat, but that by keeping inflation low, it helps the overall financial picture by allowing for more employment opportunities and helps give both consumers and businesses purchasing power while still being certain about their incomes and profitable futures.
The Deputy Governor also spoke on the increasing home prices, especially in Vancouver and Toronto, and the Bank’s reluctance to raise them. Mr. Murray, along with the Governor of Bank of Canada, Mark Carney, both believe that even though these areas are of concern, raising interest rates could hurt the economy as a whole, instead of improving it. However he warned, it’s very important that homeowners and brokers consider home equity loans very seriously before taking one on, or approving one.
“Although other policy levers, such as bank regulation and macroprudential tools, are typically the first lines of defense in ensuring financial stability, monetary policy can, in exceptional circumstances, play a complementary roles in achieving this end,” said Mr. Murray. “Fortunately, there is enough flexibility in the present monetary policy framework to do so while achieving our inflation target over the medium term. One is not sacrificed to benefit the other.”
He went on to speak about household debt and mortgage debt saying, “Home equity loans are good, but for some, potentially a little risky,” he answered in response to a question from the audience of brokers.
Mr. Murray had opened his remarks by comparing Canada’s situation with those outlined in the classic novel The Great Gatsby. He showed the parallels of the book, which depict the Roaring Twenties that preceded the Great Depression and the conditions of today when “we nearly repeated the experience of the 1930s.” But, we managed to avert it, and he finished off his comments on a positive note saying, “We already have a fair degree of financial stability in Canada. We’re very fortunate.”
