Bank of Canada Governor Stephen Poloz gave a speech today focused on the things keeping him awake at night.

Before getting to his concerns, Poloz laid out his view on the current state of play, noting that 2018 is “looking positive”, with the export recovery to be “pulled along by rising foreign demand”. Referencing prior speeches, he judged that “we find ourselves quite close to home, and getting closer”.

The focus of the speech were the several key issues that concern the Governor: cyber threats, high home prices and household debt, and the tough job market for young people. He also commented on cryptocurrencies.

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The latter risks are probably of most interest. On house prices and household debt, the 40% figure came up twice: this is both the share of housing backed loans that have a home-equity line of credit (HELOC) component, and the share of those HELOC borrowers that are not regularly paying down their principal. Poloz sees this as a risk, particularly if these lines of credit are being used to further speculate in housing markets. He was very supportive of the updated B20 mortgage stress test, advising borrowers that may choose to skirt the regulation by choosing an institution that doesn’t impose the new test that ensuring you can handle rising rates is nevertheless a good idea.

Poloz noted that of the more than 350k full-time jobs created so far this year, only about 50k have gone to those aged 15-24. He also remarked that were the youth participation rate be brought back to pre-crisis levels, some 100k more young people would have jobs. This has the potential to create a long-term impact if these young people are not building the work experience that they otherwise would be. Encouragingly, the Governor noted that with the economy in a sweet spot right now, people are being more encouraged to enter or re-enter the workforce, as seen by rising wages and a tick-up in the participation rate among young people.

The Governor also took a moment to comment on cryptocurrencies, calling the term itself a misnomer as instruments like Bitcoin, in his view, are neither a store of value or act as a medium of exchange. Noting that he was not giving investment advice, he characterized the market as buying risk – calling it more like gambling than investing.

Key Implications

For Governor Poloz, what keeps him up at night isn’t wondering whether Quentin Tarantino will actually make a Star Trek movie (though it might be), but ongoing issues in the Canadian economy. Specifically, it is cyber threats, housing markets and household debt, and the state of youth employment that generate restless nights for the Governor. However, in each case, Poloz made the point that progress is being made.

Indeed, despite the speech ostensibly being about the Governor’s worries, it carried a somewhat hawkish bent. The three key areas of concern are seen as being addressed, at least on an ongoing basis. On top of this, while we were reminded that monetary policy is an exercise in risk management, ultimately Poloz sees the economy as being ‘quite close to home’ and has maintained a positive characterization of 2018 – something that suggests that we may be closer to the next hike than markets have been expecting of late.

Ultimately, while the decision may come down to the wire, today’s speech confirms our view that the next hike will likely come sooner rather than later. As discussed in our latest Quarterly Economic Outlook, the Canadian economy is expected to run at an above-potential pace for a while longer. As such, although caution remains the watchword, we expect the incoming data to guide Poloz towards another rate hike in early-2018.


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