October 31, 2017 / 8:55 PM / 22 days ago

UPDATE 2-Bank of Canada's Poloz: Canada at crucial spot in economic cycle

(Adds remarks from Wilkins, housing background)

By Leah Schnurr

OTTAWA, Oct 31 (Reuters) - Canada is at a “crucial” spot in the economic cycle and faces a number of significant uncertainties, Bank of Canada Governor Stephen Poloz said on Tuesday, reiterating that the central bank will be cautious in making future changes to interest rates.

After two back-to-back hikes this year, the central bank held rates steady last week, even as it said the economy was at or near full capacity.

With growth expected to slow next year after what is shaping up to be a strong 2017, Poloz highlighted the main sources of uncertainty for the central bank, including soft inflation and wage growth, as well as high household debt.

“We are at a crucial spot in the economic cycle, and significant uncertainties are clouding the way forward,” he told a parliamentary committee.

Poloz’s comments reinforced the dovish tone the bank struck last week, repeating that the economy was likely to require less monetary stimulus over time but policymakers would be “cautious” in adjusting rates in the future.

Data earlier in the day also bolstered expectations the bank will pause in raising rates for now, with the Canadian economy unexpectedly shrinking in August. Markets now see just a 21.3 percent likelihood the bank will hike at its next meeting in December.

Poloz told lawmakers the elevated level of household debt represents an ongoing vulnerability to the economy if it is hit by a negative shock. He said the central bank will be watching to see how households absorb the higher borrowing costs.

Higher interest rates can affect borrowers differently over time, depending on whether they have a variable or fixed-rate mortgage, said Senior Deputy Governor Carolyn Wilkins, who also appeared before the committee.

It can take up to 24 months for the impact to unfold and can dampen both consumption and home prices, Wilkins said.

“All these channels come together to mean when people are more highly indebted, it’s going to have a larger impact,” Wilkins said.

Canada has had a robust housing market in the years since the global financial crisis, largely due to low interest rates and rising concerns consumers have taken on too much debt.

Canada’s housing markets still show signs of overvaluation, the federal housing agency said last week, though it forecast a slowdown in sales and price gains over the next two years. (Reporting by Leah Schnurr; editing by David Gregorio and Dan Grebler)

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