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Key Points

The Bank of Canada projected a quicker return to full capacity than in its last quarterly report in January. It forecast the nation’s output gap will close in the first half of 2018, earlier than a January call for the return to full capacity in mid-2018. That implies at least a one-quarter faster return. That reflects two things: a “higher profile for economic activity” and a reduction in the bank’s estimate for potential growth, which was cut to 1.3 per cent in 2017 from a previous estimate of 1.5 per cent. Faster-than-expected GDP growth in 2017 — the bank increased its growth estimate for the year to 2.6 per cent from 2.1 per cent — is largely due to residential investment being brought forward from future years and will largely dissipate by 2018, the central bank estimates. As a result, the central bank lowered its estimate for 2018 growth to 1.9 per cent. The amount of excess capacity in the first quarter of this year is estimated at three-quarters of a per centage point of GDP, versus 1.25 per cent in the fourth quarter of 2016.

Highlights of press conference

POLOZ ON DEMAND FOR HOUSING IN TORONTO:

“Demand for housing is strong in the greater Toronto area. That’s very fundamental. Employment growth has been strong, immigration growth has been strong, so there is obvious demand for housing. In that context, supply, although it has been growing, it has not been growing as fast as demand. So there’d be fundamental upward pressure on prices. We have known that for some time, so that hasn’t changed. What has happened in the last year is that things have accelerated from that high teens to the 30 percent zone for price increases. Well, there is no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it is that gap between what fundamentals could manage to explain and what is actually happening, which suggests that there is a growing role for speculation in that. In other words, demand is being driven more by speculative demand or investor demand as opposed to just folks that are buying a house.”

POLOZ: IT’S TIME TO REMIND FOLKS PRICES OF HOUSES CAN GO DOWN AS WELL AS UP:

“As we’ve observed more than a year ago in the case of Vancouver, where we had similar kind of data points, when there is that large of a gap between what fundamentals might say and what you actually observe, then there is very unlikely to be a sustainable rate of price increase and I think it is timely to remind folks that prices of houses can go down as well as up.”

POLOZ ON WHETHER A RATE CUT REMAINS AN OPTION:

“A rate cut, or further easing in policy, remains possible in the sense that there may be risks that are realized in the outlook, that pull us below the projection that we are offering up today.”

“When we talked about that a few months ago we had seen a series of disappointing data points that led us to believe that the risks were beginning to tilt towards to the downside and the uncertainties that we were dealing with were similarly negative.”

“And so it’s in that context that we discussed the possibility of easing. But in this context, given the data that we’ve seen in the last few months, I can quite clearly say no, a rate cut was not on the table at this time.”