Oct 31 (Reuters) – Below are key quotes from an appearance by Bank of Canada Governor Mark Carney on Wednesday in Ottawa:
ON REASONS FOR ACCOMMODATIVE MONETARY POLICY:
“As we’ve been discussing there are a lot of headwinds against the Canadian economy from the rest of the world. There’s a challenge to encourage business to invest. There are pressures on the currency. There are a variety of reasons why it’s advantageous to have very accommodative monetary policy and that’s what we have here in Canada, very accommodative monetary policy. And monetary policy consistent with that 2 percent inflation target.”
ON HOUSING MARKET ADJUSTMENT:
“We’re getting some mixed signs in terms of the evolution of household imbalances. There’s been a slowing in the rate of growth in debt that is notable, we think that is continuing as we speak. There has been signs of adjustment in the housing market itself in various pockets … the condo market is still pretty hot. The other housing markets are adjusting and so we with others are continuing to watch the situation and be vigilant and will respond as appropriate.”
ON STRENGTH OF THE CANADIAN DOLLAR:
“Despite the very considerable headwinds that this economy faces from abroad, weakness in the United States one example, weakness in Europe another obvious example, the strength of our Canadian dollar which is related to that, we continue to grow and our expectation is that we will over the course of the next year take up the remaining amount of slack gradually.”
ON GOVERNMENT BONDS AND MORTGAGE RATES:
“The other risk that individuals have to take into account is not necessarily a bet on where Bank of Canada policy goes, exclusively, because the mortgage rate obviously is a product of where the bond market goes and well we’re all familiar with how low government bond rates are on a global basis. There are scenarios where there could be an increase over time in government bond rates, not because of monetary policy but because of just the sheer level of borrowing and uncertainty that develop on a global scale about the sustainability, so a credit premium coming into those bonds, and so that would also affect mortgage rates as well over time.”
ON LIMITING THE SIZE OF CANADIAN BANKS
“If the question is should we, is our view that we should have a specific cap on size in Canada, the answer would be no. Do we have a cap on size in Canada? The answer is no. But is there a competition policy in Canada, are there other financial stability considerations? The answer of course is yes. And do those effectively limit the degree of concentration and size? Yes, certainly in terms of concentration and mergers, with the ultimate responsibility being held by the minister of finance.”
ON BANKS BEING “TOO BIG TO FAIL”
“There are two broader issues for a country like Canada that need to be considered. The first is relative size of the financial sector versus the economy as a whole we don’t think this is the case in Canada but there were other economies in the world where the size of their financial sector was multiples of their GDP.”
“Every economy has to think about this question of ending too big to fail, and ending the perception of too big to fail and … ending too big to fail is central to the agenda of the Financial Stability Board and by extension to Canada as a whole. There’s a variety of mechanisms or policies that are necessary to do that.”
ON RISK OF HIGH DEBT-TO-INCOME RATIO
“When you’re in a situation, as we are, where debt as a whole is very high relative to income in the economy, the possibility of procyclicality happening when there is a shock to the economy, so there is a shock, unemployment goes up, some people start to be unable to service their mortgage for obvious reasons, that starts to hit house prices. That reduces the willingness of people to buy houses. At the moment they hold back as prices move down, and there is less activity in the housing sector, there’s more unemployment. These types of procyclicalities can cause the problem. It’s one of the reasons why we obviously focus on the debt side and the liquidity and the ability to service that debt side on a variety of circumstances. All that said, our warnings about this issue are driven from a position of the country and officials and individuals being able to do something about it. The horse is not out of the barn.”