OTTAWA - October 06, 2009 - The possibility exists that the Bank of Canada may have to break its conditional pledge on interest rates should the housing market continue its red-hot performance, economists at Toronto-Dominion Bank said Tuesday.
"The Bank of Canada will likely be watching developments in Canadian real estate quite closely," say economists Craig Alexander and Grant Bishop. "If surging existing home sales do not cool, the bank may be inclined to respond."
The Bank of Canada, in its effort to revive the economy, has pledged to keep its policy rate at a historic low, 0.25%, until June 2010. This has drawn homebuyers into the housing market, as there is the belief that this will be as good as it will get in terms of borrowing costs.
The TD prediction comes hours after Australia's central bank surprised markets and raised its benchmark rate by 25 basis points – a sign it believes the economy is in recovery mode.
While raising rates may not be his preferred option, the TD report said Mark Carney, the Bank of Canada governor, has hinted in recent remarks that he is prepared to "lean" against so-called prevailing wisdom when undertaking future decisions regarding monetary policy. That could mean, they suggest, raising rates even though inflation is not hovering near the central bank's 2% target.