Higher shelter inflation will be the dominant driver of headline inflation: economist
A pair of economists say the Bank of Canada’s latest summary of deliberations shows the bank is struggling to strike the right balance on when to begin cutting interest rates.
On Wednesday, the Bank of Canada released its summary of deliberations for its Jan. 24 rate decision, which shows members of the bank agreed that the focus will now shift on how much longer rates will stay at five per cent. However, the summary said it remains “difficult to foresee” the appropriate time to begin cutting.
Randall Bartlett, senior director of Canadian economics at Desjardins, said the struggle to predict when rate cuts will come is the part of the deliberations that stuck out most.
“It (the Bank of Canada) sees risks on both sides of its inflation outlook where we're seeing that underlying inflation is still remaining elevated and there's a risk that it could remain sticky going forward. That would mean potentially that rates would need to stay high for longer,” he told BNN Bloomberg in a television interview Wednesday.
“At the same time, those high interest rates are weighing on consumers as they continue to renew their mortgages and we're seeing that consumption per capita has been declining for the past several quarters.”
Sal Guatieri, director and senior economist at BMO Capital Markets, said the deliberations show the central bank is likely done with further hikes. He added that since the Jan. 24 meeting, Macklem made two things clear.
“One, the Bank of Canada is no longer thinking of raising rates further, the next move in rates almost certainly is a reduction, but at the same time don't expect that reduction to occur anytime soon,” Guatieri told BNN Bloomberg in a television interview Wednesday.
“We know the Bank of Canada did remove its so-called tightening bias at that meeting simply because the economy is so weak right now.”
Underlying numbers still high
Guatieri said the Bank of Canada needs assurances that it is on track to its two per cent inflation target before it can think about cuts, but underlying inflation of around four per cent remains a concern.
“Rents are going up at a very fast-paced eight to nine per cent range, (there’s) not a whole lot the bank can do about that, as we've heard from the governor,” he said.
“Wages are also going up four to five per cent. You couple that with declining price productivity, that means unit labour costs are going up at about a six per cent rate in the past year. That's about three times faster than what would be consistent with a two per cent inflation target.”
Bartlett said if interest rates are cut too soon, the housing market could rebound and further stoke the underlying inflation numbers.
“The bank really needs to see that as long as shelter inflation is high that other sectors, other components of inflation that are more domestically driven need to start coming down well below what's typically consistent with this two per cent target to offset the strength of shelter inflation,” he said.
“If home prices rebound and mortgage interest cost remains high, that could mean that shelter component just continues to drive underlying inflation higher.”
Guatieri said if the federal government is going to address housing costs, it will need big investments and sacrifices in other areas.
“We do need to pump more and more resources into building homes that does leave less money and resources available to invest in other perhaps more productive endeavors that would ultimately pay off,” he said.
Economists largely believe interest rate cuts could come as soon as April, with the most likely scenario coming sometime around June.
With files from The Canadian Press