The Bank of Canada kept its benchmark interest rate steady on Wednesday even though it said vulnerabilities in the household sector, which has been stretched by high debt spurred by people taking advantage of cheap mortgage costs, continued to edge higher.
Despite signaling the challenges in the household sector, it said “overall risks to financial stability are evolving as expected.” The central bank will present its semi-annual assessment of financial stability on Dec. 15.
Canadian household debt relative to income is at a record high, as the housing market continues to rise in Toronto and Vancouver and people taking on cheap mortgages.
Some critics have said the bank is spurring Canadians to take on more debt than they can carry, especially once rates eventually start to go up. The central bank has said it is only the last line of defense against household risks.
A Reuters survey of analysts had overwhelmingly expected no rate change on Wednesday. The median forecast was for a hike in the first quarter of 2017.
The central bank kept its overnight interest rate at 0.5 percent and said it saw Canadian and global growth evolving broadly in line with its October Monetary Policy Report.
It said policy divergence was expected to remain a prominent theme, a reference to potential tightening by the U.S. Federal Reserve and possibly the Bank of England, while monetary policy is loose elsewhere.
The bank shrugged off what it characterized as slightly higher bond yields in Canada, saying that financial conditions remain accommodative and the risks around the inflation profile remained roughly balanced.
It said Canada’s complex and lengthy adjustment to lower terms of trade, driven by lower oil and commodity prices, were being aided by the ongoing U.S. recovery, a lower Canadian dollar, and the Bank of Canada’s two rate cuts this year. But it said private demand in the United States had proven “slightly less robust than expected.”