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policymakers are
increasingly concerned about the level of debt Canadians
have built up as they
borrow to buy houses or take out loans against the
equity in their homes.

BOC's Carney Urges Care On
Use Of Foreign-Capital Inflows04/27/2012
| 12:56pm

    (Updates with analyst comments and details throughout.)


   --Says foreign investors drawn by Canada's relative strength


   --Warns again on excessive household debt


   --Not "obsessed" with Canadian dollar

      By Nirmala Menon      Of   


  Bank of Canada Governor Mark Carney Friday said the country will continue to
attract foreign capital thanks to a relatively strong economy and sound banking
system, and urged care on how the funds are used, saying they should be directed
towards business investments that can boost competitiveness.


   Canada is among a shrinking group of triple-A rated nations, and foreign
demand for Canadian bonds has pushed yields down, helping to lower mortgage
costs and making it cheaper to fund property projects. But policymakers are
increasingly concerned about the level of debt Canadians have built up as they
borrow to buy houses or take out loans against the equity in their homes.


   Speaking at a breakfast presentation in the Canadian capital, Carney said
it's "realistic" to expect that Canada will continue to draw "sizeable" foreign
capital over the next decade and it's "imperative to use cheap foreign capital
to maximum effect."


    "The question is, what are we going to do with that capital? (Are we)
going to build houses or (are) we going to invest in our businesses and retool
our competitiveness?" he said.


   Central banks are looking to diversify some of their reserves into Canadian
assets, Charles St. Arnaud, foreign-exchange strategist and economist at Nomura
Securities in New York, said in an interview. Canada is also seeing so-called
"safe-haven" flows from private investors moving out of Europe and the U.S.
These inflows have helped  drive up the Canadian dollar.


   St. Arnaud said Carney is concerned that much of the foreign capital has
been channeled to housing and consumers, and would prefer to see it go towards
business investments to boost productivity and lower the cost of production.



   "One can argue part of the reason why there are so many condo towers is
that the cost of funding those projects is relatively low," St. Arnaud said.



   Carney again warned about the risks of excessive household debt and called
for prudence, cautioning against repeating the mistakes that led to the U.S.
housing slump.


   "We've seen this movie. It just played in a major cinema just south of
here, over and over and over again. It would be the height of folly to repeat
those mistakes," he said.


   Carney called the persistent strength of the Canadian dollar a challenge,
but noted that currencies are relative prices. "We're not obsessed with the
currency, but we're very focused on the currency's important relative price," he
said. "It affects activity and inflation in Canada and it certainly enters into
our thinking in terms of the conduct of monetary policy."


   The Bank of Canada expects growth to be above-trend and "there's relatively
little excess capacity in the economy," he said. It has forecast growth of 2.4%
for both 2012 and 2013.


   Carney said there's a demand-driven commodity "super-cycle" going on which
will keep prices elevated for some time. He said higher commodity prices are
typically a net positive for Canada, but oil-price dynamics are such that it's a
net negative at the moment.


    He said global challenges continue to weigh on the Canadian economy.
Deleveraging in Canada's key trading partners, particularly the U.S., will hurt
demand for Canadian exports. There could also be continued financial system
volatility emanating from outside Canada.


   He said there are "real tensions" in Europe and "big risks" around the
Bank's forecasts for a weak recovery in the euro-zone at the end of the year.
Carney said it will take years for a resolution of the problems in Europe.


   Website: http://www.bankofcanada.ca


   -By Nirmala Menon, Dow Jones Newswires; 613-237-0668;
[email protected]

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