The nationwide cooling of Canada’s housing market may have sparked fears of a U.S.-style housing crash, but for the Bank of Canada it may be a good beginning.
In a speech to the Toronto CFA Society today, Bank of Canada Governor Mark Carney said the signals are still mixed.
“We wouldn’t declare mission accomplished by any stretch, but we’re encouraged by the direction we’re seeing,” says the banker, who will be heading the Bank of England effective July 1, 2013. “There are some stretched valuations in the residential markets in some of our major cities.”
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Carney, who made no mention of his trans-Atlantic move during the speech, assured the Canadian housing market isn’t likely to face any major issues thanks to “the macroprudential measures that the government has taken, tightening of the underwriting guidelines that OSFI has put in place, [and] a bit because of the tightening bias of the BoC.”
He also says there are policies and measures in place to protect Canadian banks from any potential housing price collapse.
“There is a built-in cushion for the private financial sector that’s provided by mortgage insurance,” he says. “[Which means] that losses would go back to the provider of insurance, which is ultimately backed by the Government of Canada.”
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Canada’s core banking system, having raised $600 billion, is well on its way to be Basel III complaint, unlike its southern counterpart.
“[Nearly] 90% of the U.S. financial system is on a path to Basel III,” he says. “The Canadians banks are going one step further. Starting 2013, Canadian banks will meet the Basel III test of 2019, which is good for Canada and will be the competitive advantage of the Canadians banking system.”
It was a conscious decision by the OSFI to accelerate the implementation of Basel III in Canada, he adds.
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Speaking about central bank policy guidance, Carney stressed the importance of transparency for the effective functioning of capital markets and monetary policy.
“Central banks pursue transparency to be accountable in democratic societies,” he says.
Over time, the Bank of Canada has become significantly more transparent in discussing the forces affecting the Canadian economy, in order to help households, firms and financial market participants understand how monetary policy will respond over time.
In April 2009, when conventional monetary policy had been exhausted, the BoC provided additional stimulus by way of holding the policy rate at its lowest-possible level, subject to the inflation outlook.
“Our conditional commitment worked because it was exceptional, explicit and anchored in a highly credible inflation-targeting framework,” said Carney.
Central banks could also publicly announce precise numerical thresholds for inflation and unemployment. If additional stimulus were required, policymakers could consider a framework change, such as adopting a nominal GDP-level target, he says.
However, he cautions “the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.”