Housing costs are now the biggest contributor to inflation, but the Bank can’t use its policy rate to fix long-standing housing supply problems, Governor Tiff Macklem warns.
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“The excessively high price of housing is a real problem in Canada, but we cannot solve it by raising or lowering interest rates […] Monetary policy cannot solve everything,” warned Tiff Macklem, governor of the Bank of Canada during a speech at the Bonaventure Hotel in Montreal on Tuesday.
“Yes it’s true, most people need a loan to buy a home. Changes to the key rate therefore have a very rapid effect on housing demand. But the effects of monetary policy on supply are much more limited,” he added.
“The supply of housing has not kept up with demand for several years, in particular because of zoning restrictions, delays in approval processes and the lack of qualified workers,” he continued.
The mortgage bomb
The newspaper asked Mr. Macklem about the danger to the Canadian economy posed by the hundreds of thousands of people who will have to renew their mortgage loans by 2025-2026, and at rates much higher than what they are used to so far. Remember 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 Newspaper.
“You are right, when Canadians renew their mortgages, most of them will have much higher interest rates. High interest rates have already had an impact on Canadians. The growth rate of consumption is zero and per capita, it is even declining. So we are already seeing an effect,” he replied.
But, he adds, as long as the unemployment rate remains low and Canadians have jobs, the worst will be avoided.
“What we see in the data is that Canadians are paying their mortgage. That doesn’t mean it’s easy when rates are higher, they need to pay more for the mortgage and they [en] left less 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 at the moment is slightly increasing, but it remains quite low and most people are working,” he emphasizes.
He defends the Bank’s balance sheet
Mr. Macklem took advantage of his platform to show not only the limits of monetary policy, but also its successes.
“In recent years, some have called monetary policy into question. But in Canada, inflation peaked at just over 8% in 2022 – its highest level in decades. At the end of 2023, it was around 3.5%. We are happy with this decline, which is the result of vigorous monetary tightening. The Bank of Canada has raised its key rate 10 times in 17 months. It slowed demand, rebalanced the economy and lowered inflation. Monetary policy is working,” he said.
Remember that during the 25 years before the pandemic, inflation averaged close to 2%.