* Central bank has signaled rate hike not imminent
* Warns that bond markets can also influence mortgage rates
* Says Canada's financial sector not too big
By Randall Palmer
OTTAWA, Oct 31 Bank of Canada Governor Mark
Carney, on the heels of telling markets that an interest rate
hike was not imminent, offered several reasons on Wednesday for
why the central bank has kept rates exceptionally low.
"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," Carney
told a parliamentary committee.
"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."
The Bank of Canada is the only central bank in the Group of
Seven leading industrialized nations which has hinted at raising
interest rates. But Carney has effectively cautioned that it
will be some time before it withdraws monetary stimulus.
That message was reinforced on Wednesday by data showing the
Canadian economy shrank in August for the first time in six
months, an unexpected contraction that pointed to a sharp
slowdown in third-quarter growth.
HOUSING MARKET, DEBT GROWTH COOLING
Carney, who was testifying to the Senate banking committee
following the release of the bank's quarterly Monetary Policy
Report, was asked what could be done to contain what has been a
hot housing market and high household debt levels.
He repeated his line that moving rates higher should be the
last line of defense, though he said that ideally monetary
policy should be complementary to other government measures.
Carney said condominium markets remained hot while other
parts of the housing sector were adjusting to government
measures to tighten mortgage insurance rules.
He warned that even if the central bank does not raise its
main policy rate, individuals face the risk of higher mortgages
rates because of what happens to the bond market.
"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," he said.
Carney is also chairman of the international Financial
Stability Board, and he addressed the issue of banks being
considered 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," he said.
"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
Carney said he did not believe there should be a specific
cap on the size of banks in Canada, as there is in some other
countries. But he said there was an effective limit on
concentration and size, with the ultimate responsibility held by
the finance minister.