Housing costs are currently the biggest contributor to inflation, but the Bank cannot use its key interest rate to solve long-standing housing supply problems, Governor Tiff Macklem warns.
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“Excessively high housing prices are a real problem in Canada, but we cannot solve it by raising or lowering interest rates […] Monetary policy cannot solve everything,” Bank of Canada Governor Tiff Macklem warned during a speech at the Bonaventure Hotel in Montreal on Tuesday.
“Yes, it’s true, most people need a loan to buy a house. Changes in the key interest rate therefore have a very rapid impact on housing demand. But the impact of monetary policy on supply is much more limited,” he added.
“Housing supply has not kept pace with demand for several years, particularly due to zoning restrictions, delays in permitting processes and a shortage of skilled workers,” he continued.
The mortgage bomb
The Journal asked Mr. Macklem about the threat to the Canadian economy posed by hundreds of thousands of people having to renew their mortgage loans between now and 2025-2026, at interest rates well above what they originally paid up to now. Recall that a former deputy governor of the Bank of Canada, Paul Baudry, had expressed serious concerns about this coming “mortgage bomb” in the pages of the Journal.
“You're right, when Canadians renew their mortgages, most of them will have much higher interest rates. High interest rates have already impacted Canadians. The growth rate of consumption is zero and per capita it is actually declining. So we are already seeing an effect,” he replied.
But as long as the unemployment rate remains low and Canadians have jobs, the worst can be avoided, he adds.
“What we see in the data is that Canadians are paying their mortgage. That doesn't mean it's easy when interest rates are higher, they have to pay more for the mortgage and they [en] There was less left for anything else. But the most important thing for households to be able to pay their mortgage is to have a job. “The unemployment rate is currently rising slightly, but remains quite low and most people are working,” he emphasizes.
He defends the bank's balance sheet
Mr. Macklem used his platform to highlight not only the limits of monetary policy, but also its successes.
“In recent years, some have questioned monetary policy. But in Canada, inflation peaked at just over 8% in 2022 – the highest level in decades. At the end of 2023 it was around 3.5%. We are pleased with this decline, which is the result of a significant tightening of monetary policy. The Bank of Canada has raised its key interest rate ten times in 17 months. It curbed demand, rebalanced the economy and reduced inflation. Monetary policy is working,” he said.
Remember, inflation averaged nearly 2% in the 25 years before the pandemic.
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