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Why Does Scotiabank want BoC to Raise Rates?

6 September 2013

Here’s a riddle for you. Housing markets are up all across the country, and economists and the government have both agreed that there’s likely no hard landing to be felt in this country. So why then does Bank of Nova Scotia’s chief executive officer, Rick Waugh, still feel as though raising the key policy interest rate would be a good thing?

It’s not clear exactly. What is clear is that nearly every market across the nation is looking healthier than they were a year ago at this time. In July Toronto experienced a 21 per cent increase in sales over MLS, and even watered-down Calgary saw a rise of 27.5 per cent in sales, despite the fact that some thought they’d see a long period of drops due to the flooding. And Vancouver? That market that seemed on the verge of implosion for over a year? Things are looking up – way up – there with a jump of 52.5 per cent in year-over-year sales.

Sounds good, right? But for Mr. Waugh it doesn’t seem to be enough. He thinks there’s still concern in these markets, and believes that the Bank of Canada should start raising their rates in order to tame them.

“I do not think there is a bubble,” Mr. Waugh stated during a speech at the Empire Club in Toronto. “It’s not an underwriting or credit problem, it’s the fact that low interest rates do cause bubbles. I do not think there is a bubble, but if you’re really concerned, and you’re a policy maker, you know what the right thing to do is? Raise interest rates.”

But the policy makers aren’t concerned. At least not that much, and not nearly to the point they were when Finance Minister Jim Flaherty instated all those mortgage rules last year (and the three years preceding.) In fact, during the interest rate announcement made this week the Bank of Canada stated,

“While the housing sector has been slightly stronger than anticipated, household credit growth has continued to slow and mortgage interest rates are higher, pointing to a continued constructive evolution of household imbalances.”

The policy makers know that households are walking a fine line with debt, but it sounds like they also know that raising the key interest rate isn’t the way to get a better grip on it. After all, with the housing market doing better than they thought it would, and mortgage rates already rising at nearly all the major banks, wouldn’t raising that key policy rate only add to the amount of debt and burden of the Canadian people?

What do you think about Mr. Waugh’s comments? Do you agree, or believe this is just another way for banks to make even more money off the Canadian people?

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