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Don’t look to the BoC to solve Canada’s housing and economic woes, Macklem says

OTTAWA — Bank of Canada governor Tiff Macklem is laying out the limits of monetary policy as he warns the central bank can’t solve problems such as housing affordability with interest rates.

According to prepared remarks Macklem delivered in Montreal Tuesday, he says history shows monetary policy is quite effective at controlling inflation in the medium term.

But the governor says it also has limitations, including an inability to address short-term price fluctuations.

And despite the effect of higher interest rates on shelter costs today, the governor says monetary policy cannot address the structural barriers behind the housing crisis.

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“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,” he said.

The governor delivered a similar message to MPs on the House of Commons finance committee last week as he faced questions about housing affordability.

In a news conference later on Tuesday, the governor said he's making it clear that the central bank can't do much about housing affordability because it keeps getting asked about it.

"It's the question that we're getting from Canadians, we're getting from elected officials, we're getting from businesses. So we're really responding to (that)," he said.

The Bank of Canada’s rate hikes have fed into higher mortgage interest costs for homeowners and borrowing costs for developers. However, high population growth has added fuel to the fire as more people look for shelter.

The central bank says shelter costs are now the primary driver of above-target inflation.

Canada’s inflation rate was 3.4 per cent in December. Meanwhile, shelter prices were six per cent higher than a year ago.

Macklem also warned in his speech that interest rates can’t fuel economic growth in the long run, noting that can only be accomplished through population growth or productivity growth.

“Canada has been very good at growing its economy by adding workers,” the governor said. “But productivity growth, by which I mean more output for the same amount of work, has disappointed. This is a problem because higher productivity pays for higher wages and underpins a rising standard of living.”

The Bank of Canada is currently holding its key interest rate at five per cent and is widely expected to start cutting rates around mid-2024.

Although the central bank is avoiding discussions on the specific timing, the governor has indicated that it is now trying to gauge when it will be able to start cutting rates.

Economists expect rate cuts to reinvigorate the housing market and raise home prices again as more people enter the market.

The start of the year has shown signs of a rebound in some major cities, including in the Greater Toronto Area where home sales soared 37 per cent in January compared with the same month a year ago and in Greater Vancouver where sales surged 38.5 per cent.

Macklem told reporters the Bank of Canada has factored in increased housing market activity in its economic forecasts. But ultimately, he said policy decisions will be based on overall inflation.

"We're not targeting housing, we're targeting inflation."

This report by The Canadian Press was first published Feb. 6, 2024.

Nojoud Al Mallees, The Canadian Press