October 22, 2014 10:23 am
Updated: October 22, 2014 11:35 am

Bank of Canada holds rates low, warns over ‘hot housing market’

Bank of Canada governor Stephen Poloz has maintained near-record low borrowing rates first put in place four years.

THE CANADIAN PRESS/Adrian Wyld
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The Bank of Canada is keeping its trend-setting interest rate at one per cent, as expected, but it cautioned on Wednesday the economy needs exports to pick up and businesses to start investing more.

Those developments are required, experts say, to relieve the burden on consumers who have held up the economy in recent years but now face overstretched household finances — in part to pay down big loans on homes in big markets where prices continue to rise fast.

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“Housing activity has been been more robust than anticipated,” the bank’s report said, adding that “financial stability risks” associated with rising debt levels have increased since its last review in the summer.

MORE: Bloated debt loads, high home prices pose risks to economy

The central bank blamed still near-record low borrowing rates for “renewed vigour” among consumers to borrow. Sales of existing homes have hit a four-year high, the bank said, “contributing to sizable increases in house prices.”

“They sounded a tad more concerned on the hot housing market,” Doug Porter, BMO chief economist, said. “There is no more brave talk about a soft landing for housing.”

The Bank of Canada slashed its key lending rate to record low levels during 2008-09 downturn to help spurring borrowing and economic growth. It has left overnight lending rates at 1.0 per cent since 2010.

‘There is no more brave talk about a soft landing for housing’

Regional divergences

The source of the bank’s concern appeared exclusively on “major cities” in Ontario, Alberta and British Columbia, whose biggest centres of Toronto, Calgary and Vancouver have seen their already pricey housing markets rise even higher this year as most pockets across the rest of the country have cooled.

MORE: Canada’s housing boom comes down to just 3 cities 

The bank says while Canadian exports have begun to pick up with the help of the strengthening U.S. economy and lower Canadian dollar, business investment has remained very weak.

The central bank now predicts the economy will expand by 2.3 per cent this year, an improvement of one-tenth of a percentage point compared to its July projection. It is keeping its 2015 expectations of 2.4 per cent growth intact.

Global growth, the bank’s report says, has been disappointing due to factors such as financial stress in China and geopolitical uncertainties, including ongoing tensions between Ukraine and Russia.

The bank says it’s maintaining its overnight-rate target because of the collection of downward pressures from all sides on Canadian inflation, such as the lower Canadian dollar, cheap oil prices and disappointing global growth.

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