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Bank of Canada frets over hot housing market, indicates rate hike off cards



The Bank of Canada said on Thursday that Canada‘s hot housing market and high household debt levels had left the economy more vulnerable to economic shocks, but made clear it would not raise interest rates to cool the frenzy.

A housing market boom and linked rise in mortgage lending has helped buoy economic growth in the short-term, but they increase the risk over the medium-term, the central bank said in its annual review of financial systems.

Despite the intensifying risks, the focus remains on getting the hardest-hit segments of the economy through the COVID-19 crisis, Bank of Canada Governor Tiff Macklem said.

“We do factor housing into our monetary policy decisions but we do have to look at the whole economy … there are important parts of the economy that remain very weak and the economy needs our support,” he told reporters.

Macklem made his remarks when asked if guidance on rate hikes could change to deal with rising home prices. The Bank has signaled it will hold its key benchmark interest rate at a record low 0.25% until the second half of 2022.

But, in his strongest comments yet on housing, Macklem said recent price surges were “not normal” and eventually interest rates would go up.

“Some people may be thinking that the kind of price increases we’ve seen recently will continue. That would be a mistake,” Macklem said.

Canadian home sales and prices have surged in recent months, as demand has outpaced the available supply. The average price nationwide jumped 41.9% in April from the previous year, when prices inched down amid a pandemic plunge in sales.

The housing boom has led to a jump in mortgage debt, sending total household debt up sharply since mid-2020.

“The vulnerability associated with elevated household indebtedness is significant and has increased over the past year,” the bank said, adding the quality of new mortgage borrowing had deteriorated.

About 22% of all new mortgages have a loan-to-income ratio above 450%, the bank said. That is above the range seen in 2016–17, before Canada‘s financial regulator introduced mortgage stress tests intended to cut out risky lending.

On Thursday, the financial regulator officially made those stress test requirements tougher, a move Macklem said would be helpful. The new rules only apply to uninsured mortgages.

When asked about inflation, which rose at its fastest pace in decade in April, Macklem said expectations remain well anchored, but if they were to become unhinged the central bank would take it very seriously.

The bank said last month it expected inflation to rise to around 3% on temporary factors before settling back to the 2% target. The Canadian dollar extended its gains touching 1.2049 to the greenback, or 82.99 cents, after his comments.


(Reporting by Julie Gordon and David Ljunggren; Editing by Andrea Ricci, Aurora Ellis Kirsten Donovan)

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Canadian retail sales slide in April, May as COVID-19 shutdown bites



december retail sales

Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Canadian dollar notches a 6-day high



Canadian dollar

The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Toronto Stock Exchange higher at open as energy stocks gain



Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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