[Bank of Canada] Balancing Monetary Policy and Financial Stability
by Yvonne von Jena | November 23, 2018
Bank of Canada deputy governor Carolyn Wilkins spoke recently about how monetary and macro-prudential policies interact with each other and how they affect financial stability. She provided some clear, interesting and insightful examples that highlight the impact.
Example 1: Reduced Interest Rates in 2015
Ms Wilkins pointed to the BoC’s decision to lower interest rates in 2015, which injected some life into a sluggish economy. The unintended side effect, she said, was increases in housing prices in some of Canada's biggest cities. As a result:
"You look at social objectives and financial stability and sometimes you have to trade off," Wilkins said.
Federal efforts to cool those markets and pump billions of dollars into new affordable housing have lowered housing costs from where they could have been, Wilkins said.
Example 2: Added Stress Tests
For a sense of the impact that the stress tests have had – both those placed on insured and uninsured mortgages – one need only look at the following chart, which was included in Ms Wilkins’ presentation. It shows how the volume of new mortgages with a loan-to-income ratio of over 450% has fallen, resulting in an increase in the quality of mortgages underwritten.
The question is whether the policies will continue to work in the future, particularly if the economy goes from boom to bust. Ms Wilkens noted that indebted households have fragile finances and are vulnerable to economic trouble and the BoC is still concerned about high levels of household debt in Canada — particularly if interest rates rise too fast, too soon.