Monday, 11 November 2013

Canadian froth: blame it on the guvnor?

"Canada's housing market teeters precariously", proclaims a headline in today's FT, predicting a "prolonged correction". Over-borrowing, over-building and an epoch of low interest rates have led to house prices being over-valued by 60%, at least according to OECD computations.

All very interesting, but a little esoteric for UK readers, perhaps? It might have been except for the fact that all this apparent frothiness developed largely on the watch of current Bank of England Governor Mark, who held the same post at the Bank of Canada for five years until jumping ship this June (possibly the banking world's first example of One Man, Two Guvnorships).

Carney is credited with steering the country, relatively unscathed, through the financial crisis. But the flipside of the long period of low rates, which was part of the remedy, is that household debt has stretched to new highs (despite surprisingly interventionist policies last year towards the end of his tenure).

Will Carney tighten the grip on asset inflation quicker this time? Perhaps. But the trigger is likely to be jobs rather than house price growth. His first act at Threadneedle Street was to set a 7% unemployment rate as the most visible feature of his "forward guidance" approach to rates policy. Then he indicated it would take three years to fall to this level - a view almost universally dismissed by the markets, which see an earlier start to tightening.

The Sunday Times yesterday predicted he will bring this forward at Wednesday's BoE inflation report. This view will be bolstered by today's survey of 1,000 employers by the Chartered institute of Personnel and Development, which showed the UK's short-term job prospects at its most positive for five years. Prepare for a possibly marked change in tone on Wednesday.

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