Higher rates needed to slow housing market demand

2/2© Reuters. FILE PHOTO: A woman looks on Domestic futures regular trading platformsas she walks past cordoned off aisles of non-essential goods at a Walmart store in Toronto, Ontario, Canada April 8, 2021. REUTERS/Carlos Osorio/File Photo2/2

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) -Home price growth in Canada is "unsustainably strong" and higher interest rates are needed to moderate demand, a senior Bank of Canada official said on Tuesday, while also noting the inflationary risks of the country's overheating economy.

Senior Deputy Governor Carolyn Rogers (NYSE:ROG), answering audience questions following her first speech since joining the governing council, said the central bank does expect home price growth to moderate "a bit" as interest rates go up.

"We need higher rates to moderate demand, including demand in the housing market," she said. "Housing price growth is unsustainably strong in Canada."

The Bank of Canada made a rare 50 basis-point (bps) increase to 1% last month in its policy rate and made clear the rate will need to go higher. Money markets have fully priced in another 50 bps move on June 1, with a 15% chance of a larger hike.

Housing sales and prices, meanwhile, have started to cool from peak levels, though activity varies across the country and housing type.

Rogers spoke to a women's business group in Toronto on central bank trust and credibility, a key issue with Canada's inflation rate at a 31-year high of 6.7%, more than three times the central bank's 2% target.

"So we are acutely aware that, with some of the extraordinary actions we have taken during the pandemic and with inflation well above our target, some people are questioning that trust," Rogers acknowledged in her speech.

She pointed to global supply-chain bottlenecks and high commodity prices as the main drivers pushing Canada's inflation rate "close to 7%," but noted strong domestic demand risked further boosting price growth.

A leading figure in Canada's opposition Conservatives has said the bank's policy actions in the pandemic, namely its government bond-buying program, have fueled runaway inflation.

"With the Canadian economy starting to overheat, we can't let demand get too far ahead of supply or we risk adding further to inflation," she said.

She acknowledged interest rates remain low, reiterating they need to go higher and that the central bank is "committed to getting inflation back to target."

The Canadian dollar was trading 0.2% higher at 1.2850 to the greenback, or 77.82 U.S. cents, as the greenback dipped against a basket of major currencies.

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