The Bank of Canada Has Barked, Will It Bite?

Posted by Ed Devlin, Richard Clarida: Piimco

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Canadian Perspectives Devlin Clarida Nov2012 Fig3

Canadian Perspectives Devlin Clarida Nov2012 Fig3

  • As Canadian consumers have increased their mortgage debt and bid up housing prices, the potential for a disorderly unwinding of these imbalances rightly concerns the Bank of Canada.
  • PIMCO believes that the bank’s next policy move will be to raise interest rates, but with the traditional aim of fighting inflation rather than reducing home prices and consumer debt. 
  • We expect the Bank of Canada to continue tightening mortgage credit and using moral suasion to damp the housing boom and discourage consumers from taking on more debt.​

What is the correct policy response to a prospective asset bubble? This question has been the focus of considerable academic research, especially since the financial crisis of 2008. Recent communication from the Bank of Canada (BoC) suggests it is considering hiking policy rates in response to the recent surge in household debt and home prices. If it does, this could represent a decisive change in its inflation-targeting strategy for monetary policy. At a minimum, it would get the attention of public policymakers worldwide owing to Bank of Canada Governor Mark Carney’s position as chair of the G20 Financial Stability Board (FSB).

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