Statistics Canada is set to release its January consumer price index report on Tuesday and forecasters expect Canada's inflation rate fell. A customer browses an aisle at a Metro grocery store In Toronto on Friday, Feb. 2, 2024. THE CANADIAN PRESS/Cole Burston
As the Bank of Canada deliberates on the appropriate timing to initiate interest rate cuts, economists are debating whether this decision should be contingent on the state of the housing market.
In recent months, Canada's inflation rate has fluctuated, experiencing a slight decrease from its peak in 2022 due to waning global price pressures and a cooling economy. Statistics Canada is scheduled to unveil its January consumer price index report on Tuesday, with forecasts suggesting a decline in Canada's inflation rate. RBC, CIBC, and TD anticipate the annual rate to decrease to 3.2 per cent from December's 3.4 per cent.
According to Nathan Janzen, RBC's assistant chief economist, the deceleration likely stemmed from lower energy and food prices. Janzen highlights the importance of monitoring other components of the Consumer Price Index (CPI) for indications of ongoing moderation in inflation pressures.
As borrowing costs remain high, leading consumers and businesses to scale back spending, inflation is anticipated to gradually approach the two per cent target by year-end. However, unlike typical scenarios where rising interest rates contribute to economic slowdowns, the housing market is not expected to aid in this process. Economists predict that shelter costs will continue to rise throughout the year, posing challenges for the Bank of Canada.
James Orlando, TD's director of economics, asserts that the central bank shouldn't delay interest rate cuts while awaiting a slowdown in the housing market. Orlando argues that high interest rates are unlikely to mitigate soaring housing costs effectively.
In a recent report, CIBC also emphasized the limitations of the central bank in addressing shelter costs, suggesting that government interventions, such as reducing the influx of foreign students, might prove more effective.
The Bank of Canada has acknowledged the significant role of housing in driving inflation rates above target. Mortgage interest costs, influenced by the central bank's rate hikes, constitute a quarter of inflation, according to RBC's analysis.
Recent data from the Canadian Real Estate Association indicates a resurgence in home sales in January, hinting at a potential market turnaround. The Bank of Canada remains cautious about the possibility of a housing market rebound exacerbating inflationary pressures.
While acknowledging the central bank's limited influence over housing costs, Governor Tiff Macklem emphasized in a recent speech that monetary policy cannot address underlying issues such as zoning restrictions and labor shortages affecting housing supply.
The ongoing debate underscores the complexity of Canada's economic landscape and the challenges faced by policymakers in balancing inflation concerns with housing market dynamics.
