Interest rates alone can’t safeguard economy, Bank of Canada says

OTTAWA – The Bank of Canada says its trend-setting interest rate should not be considered the primary tool responsible for shoring up the country’s financial system.

In prepared remarks of a speech today, deputy bank governor Timothy Lane says other regulatory measures are also needed to help maintain financial stability and address any emerging vulnerabilities.

He says some of those regulatory measures include tightened mortgage-financing regulations introduced in recent years — such as the increase to minimum down payments.

MORE: Home prices in Vancouver, Toronto accelerate at ‘dramatic’ rate

Lane also says in some cases government spending — or fiscal stimulus — may be necessary, though he warns that excessively expanding public debt can have its own negative effects on the financial system.

The central bank says the most concerning vulnerability is the combination of climbing household debt and elevated house prices — a situation it predicts will continue to edge higher due to the prolonged period of low interest rates.

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Lane says the Bank of Canada is exploring the question of whether its monetary policy decisions should account for the stability of the financial system and in preventing future crises.

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The comments come as fears persist over a possible bubble in the Vancouver and Toronto housing markets.

Concern on that front prompted the federal government to move to tap the brakes on the sale of higher priced homes in December, when new mortgage rules were announced.

The changes, which come into effect this month, will require bigger down payments for buyers.

But the changes might not slow the two markets all that much, Kavcic predicted. In fact, it could have also helped accelerate things last month.

“The mere perception in the market that minimum down payments are going up this month is probably pulling forward some sales,” BMO economist Robert Kavcic said.

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