Canadian Banks Unlikely to Jeopardize Economy by Raising Interest Rates in 2011

This article appeared on The Record on February 9, 2011 and was written by Chuck Howitt.

While mortgage and interest rates are inching higher, the major banks aren’t likely to keep pushing them up if they sense household debt is too high, an economist told local real estate agents Wednesday.

Two large banks announced mortgage rate increases this week, but the banks will likely refrain from further increases if they jeopardize the economic recovery, said Paul Ferley, assistant chief economist for RBC.

The Bank of Canada became alarmed when debt-to-income ratios, fuelled by a long period of low mortgage rates, continued to rise in Canada during the recession while dropping in the U.S., Ferley said.

Traditionally those ratios have been lower in Canada, but now they are about equal in both countries, he told about 150 agents at Coldwell Banker Peter Benninger Realty.

While mortgage debt continues to be worrisome, Ferley doubted Canada is on the verge of a housing-price correction. In the late 1980s, when the last housing bubble burst, mortgage payments were growing much more quickly than incomes, he said.

The same trend has not been occurring in recent years, Ferley said.

Housing prices jumped about 20 per cent coming off the recession, but they have since begun to follow the historical pattern of more gradual increases. He expects that flattening trend to continue.

Looking at the North American economy as a whole, economists no longer fear a double-dip recession, Ferley said. The economic recovery “will be gradual, but sustained,” he said.

While a sudden eruption in the Egyptian crisis could send oil prices soaring and destabilize the world economy, the U.S. economy is gaining steam, he said. But the private sector needs to pick up the slack now that government stimulus is being turned off, he added.

The Canadian economy, while still closely tethered to the U.S. economy, is well positioned because commodity prices, particularly oil prices, remain at historically high levels, he said. He expects oil to remain at the robust price of around $90 a barrel because of demand from countries such as China and India.

High commodity prices are not necessarily good news for Ontario’s economy, which relies more on manufacturing and a healthy U.S. economy, Ferley said.

On the positive side, auto sales have climbed past 12 million units a year in the U.S. after dropping to about nine million during the recession and manufacturing has picked up, though just modestly, he noted.

In Waterloo Region, manufacturing accounts for 22 per cent of the labour force, higher than the provincial average of 14 per cent, he noted.

This is a concern, but strong building-permit activity particularly in the commercial and institutional sectors and the rebound in housing starts and employment have brightened the outlook for the local economy, he said.