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9 Apr

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The Bank of Canada had hiked the interest rates on three separate occasions over the past eight months. Each move by Bank of Canada Governor Stephen Poloz was meant to help GDP growth but the rate hikes have not done the trick. An expected GDP growth of 2.5% fell short by eight-tenths of a point and came in at a disappointing 1.7%.

This shortfall has prompted the Bank of Canada to stop tinkering with the interest rates fro now, holding them steady in an announcement made in early March. The bank is said to have taken a cautious outlook for the rest of 2018 and highlights strong housing figures in the 4th quarter of 2017 and a soft housing market in the 1st quarter of 2018 as reasons to be cautious.

Cooling Housing Market

There is an indication that there is an increase in demand ahead of new mortgage regulations and guidelines that will be implemented later in 2018. The bank says that sit will take some time to see how these new policies will have an effect on housing demand and prices. Bank of Canada is also cautious of how the economy will react as a whole to further interest rates increases of decreases. The Bank is thinking of this as a cooling off period to see where the market will settle. They highlight the fact that household credit growth has been on the decline for each month to start the year.

According to a report by Better Dwelling, mortgage credit actually went negative in January of 2018, the first time that has happened since 2011. The decrease was an estimate $184 million or 0.012% overall. This decrease in credit growth from mortgages simply means that housing demand is decreasing. This could be for several reasons including people being afraid to obtain credit due to an overall feeling of an economic decline or banks tightening their credit standards. Either way, three increases of rates in less than a year is a concern for most Canadians.

A decline in credit is a major concern for the Bank of Canada as there has been a recent trend of provinces trying to cool down the housing market due to an increased risk of a housing bubble, much like we saw in the 2000s. Banks are simply being cautious, but run the risk of being too cautious and influencing consumers to reduce spending. This could have devastating effects on several sectors.

There is evidence that this cooling off period will be good for the stabilization of the market. Many worry that the damage has already been done with the three interest rate increases since July of 2018. The Bank of Canada is hoping that some stabilization will encourage consumers to be bullish on the housing market and credit declines stabilize. However, if the damage is already done then it could take years to stabilize. It is a bet that the banks have to take and only time will tell if it is a good bet.

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