As the Bank of Canada waits for the right moment to start cutting interest rates, some economists are arguing that its decision shouldn’t hinge on the housing market. Canada’s inflation rate has edged up and down over the last several months after dropping from its 2022 highs as global price pressures fade and the economy cools.
Statistics Canada is set to release its January consumer price index report on Feb. 20 and forecasters expect Canada’s inflation rate fell. RBC, CIBC and TD all project the annual rate eased to 3.2 percent, down from 3.4 percent in December.
Nathan Janzan, RBC’s assistant chief economist says the slowdown was likely driven by energy and food prices. “Gasoline prices were lower than a year ago in January and food price growth probably continued to slow on a year over-year-basis,” he said. “I think the attention will be more focused on the other components of CPI, just watching for signs that broader inflation pressures are continuing to slow, if only at a gradual pace.”
As high borrowing costs cause consumers and businesses to pull back on spending, inflation is expected to slowly inch closer to the two percent target by the end of the year. But unlike what’s typical when interest rates rise, the housing market won’t be helping the economy slow. Economists widely expect shelter costs to continue soaring this year, making the Bank of Canada’s job that much harder.
In December, shelter costs were up six percent from a year ago and grocery prices rose 4.7 percent annually. Mr. Orlando argues the central bank shouldn’t hold off on cutting interest rates while waiting for the housing market to slow, given that high interest rates aren’t going to help get those costs down.
The Bank of Canada has recently emphasized the outsized role housing has played in propping up inflation. At the interest rate announcement last month, when it opted to continue holding its key interest rate at five percent, it noted shelter costs are now the primary driver of above-target inflation.
Mr. Orlando said if the central bank were to cut rates too early, it could cause extra froth in the housing market. But he said says the Bank of Canada should still focus on how the economy overall is faring, rather than fixating too closely on shelter.
In a recent speech, governor Tiff Macklem conceded that the central bank can’t do much when it comes to housing costs. “Housing supply has fallen short of housing demand for many years. There are many reasons why—zoning restrictions, delays, and uncertainties in the approval processes, and shortages of skilled workers. None of these are things monetary policy can address,” Mr. Macklem said on Feb. 6.