Economists expect inflation eased in January, but housing still ‘thorn’ in BoC’s side

Ottawa –

As the Bank of Canada waits for the correct second to start out reducing rates of interest, some economists are arguing that its choice should not hinge on the housing market.

Canada’s inflation charge has edged up and down over the past a number of months after dropping from its 2022 highs as international worth pressures fade and the financial system cools.

Statistics Canada is about to launch its January shopper worth index report on Tuesday and forecasters anticipate Canada’s inflation charge fell. RBC, CIBC and TD all venture the annual charge eased to three.2 per cent, down from 3.4 per cent in December.

Nathan Janzen, RBC’s assistant chief economist, says the slowdown was doubtless pushed by power and meals costs.

“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 stated.

“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 excessive borrowing prices trigger customers and companies to tug again on spending, inflation is anticipated to slowly inch nearer to the 2 per cent goal by the tip of the yr.

But in contrast to what’s typical when rates of interest rise, the housing market will not be serving to the financial system gradual. Economists extensively anticipate shelter prices to proceed hovering this yr, making the Bank of Canada’s job that a lot more durable.

“Food and housing are really the ones that are growing at an uncomfortable level and still (remain) the thorn in the side of Bank of Canada,” stated James Orlando, TD’s director of economics.

In December, shelter prices had been up six per cent from a yr in the past and grocery costs rose 4.7 per cent yearly.

Orlando argues the central financial institution should not maintain off on reducing rates of interest whereas ready for the housing market to gradual, given that top rates of interest aren’t going to assist get these prices down.

In a report on Friday, CIBC additionally famous the central financial institution is not well-positioned to assist ease shelter prices.

“Planned reductions in the inflow of foreign students, and perhaps other (government) measures still to come, might be more potent than high interest rates in calming rising rents, while the mortgage interest cost component would be helped by Bank of Canada rate cuts,” the report stated.

The Bank of Canada has just lately emphasised the outsized position housing has performed in propping up inflation. At the rate of interest announcement final month, when it opted to proceed holding its key rate of interest at 5 per cent, it famous shelter prices at the moment are the first driver of above-target inflation.

RBC says mortgage curiosity prices — that are pushed by the central financial institution’s charge hikes — account for 1 / 4 of inflation. If these prices had been eliminated, the financial institution says inflation could be within the one to a few per cent goal vary.

The Canadian Real Estate Association just lately reported dwelling gross sales picked up in January for a second month in a row. And whereas costs fell, the affiliation stated rising exercise suggests the market is beginning to “turn a corner.”

The prospect of a rebound is clearly on the Bank of Canada’s thoughts. In its abstract of the deliberations resulting in its Jan. 24 charge choice, the central financial institution stated its governing council is worried {that a} housing market rebound this spring might maintain inflation above its goal, whilst worth progress elsewhere within the financial system eases.

Orlando stated if the central financial institution had been to chop charges too early, it might trigger additional froth within the housing market. But he stated says the Bank of Canada ought to nonetheless concentrate on how the financial system general is faring, moderately than fixating too intently on shelter.

“Are you willing to sacrifice the rest of the economy, to bring down shelter inflation? And our analysis shows that you’re not even going to be able to bring down shelter inflation, no matter what you do with interest rates,” he stated.

Orlando stated to get to 2 per cent inflation, costs for different items and providers would primarily should cease rising to compensate for top housing prices.

In a current speech, governor Tiff Macklem conceded that the central financial institution cannot do a lot relating to housing prices.

“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,” Macklem stated on Feb. 6.

This report by The Canadian Press was first revealed Feb. 19, 2024.

This is a corrected story. A earlier model misspelled Nathan Janzen’s final title.