The Bank of Canada has joined the Fed in embarking on the road to monetary policy normalization, hiking the benchmark monetary policy rate +25bps to 0.75%. This comes at a time as Canada’s property market is being increasingly labelled a bubble. Indeed the second chart shows a stark acceleration in property price gains and an increasingly overvalued property market (looking at the OECD housing market valuation indicators). Thus it makes sense that the central bank would reduce monetary policy stimulus in this backdrop.
The risk in this sort of situation is always going to be that the central bank could end up bursting the bubble, and at some point it probably will, but so far this is just a small rate hike and only the beginning of the policy normalization process. As the Bank of Canada further normalizes policy the risk of a bursting of the Canadian housing bubble will rise. Given the importance of Chinese demand, it will also be important to keep tabs on economic conditions in China. At this point the risk assessment for Canada is slightly higher and the outlook is that risks will rise.
The Bank of Canada hiked the benchmark interest rate +25bps to 0.75%, joining the Fed on the path to monetary policy normalization.
The Canadian property market is running hot, with price gains accelerating and valuation indicators looking stretched. The valuation indicator is a combination of the OECD price to income and price to rent ratios (compared to history).
