Macklem: Monetary policy can’t do everything. We need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver. — Bloomberg
MONTREAL: Bank of Canada (BoC) governor Tiff Macklem says monetary policy can’t solve housing shortages that are driving up costs, suggesting that policymakers may consider looking beyond shelter inflation as they weigh how long to keep interest rates at current levels.
In his first speech since holding the policy rate at 5% for a fourth consecutive meeting, Macklem said high shelter inflation – now the biggest contributor to above-target price gains – partly reflects the impact of rate increases on mortgage interest costs.
But it’s also driven by surges in rents and other housing costs, which are due to the chronic supply shortage in the country.
“That is not something monetary policy can fix,” he said in a speech in Montreal.
“Monetary policy can’t do everything. We need to avoid the temptation to overload monetary policy by expecting more of it than it can deliver.
“The right focus for monetary policy is on what it can do. It’s already a big, difficult and important job.”
The comments raise questions about how long the central bank thinks it will need to hold interest rates at current levels if inflationary pressures, excluding shelter prices, start easing more broadly.
Last month, the governor said the bank is shifting its focus to how long rates need to remain restrictive, although he reiterated that it’s too early to consider easing.
Macklem’s comments suggest policymakers should be more willing to look through shelter price inflation when determining the appropriate path for interest rates, said Tiago Figueiredo, a macro strategist at Desjardins Financial Group, in a report to investors.
“In our view, Macklem’s acknowledgment of the limitations of the central bank’s tools tilts more dovish than previous communications.
“Assuming the economy continues to struggle under the weight of higher interest rates, the BoC seems to be positioning itself for a rate cut in the second quarter even if inflation is still hovering around 3%.”
Macklem said that while the bank’s policy has “big effects” on the housing sector via mortgage costs, its impact on supply is “much more limited.”
Housing supply in Canada has fallen short of demand for many years, due to zoning restrictions, delays and uncertainties in the approval processes, and shortages of skilled workers, Macklem said. “None of these things monetary policy can address.”
Canada’s housing markets are already showing signs of renewed activity at the start of the year, and the potential of lower interest rates risks further fuelling price increases.
“Monetary policy can particularly affect demand in the short run,” said Macklem. “But it can’t address long-running structural problems on the supply side, which are fundamental to affordability.”
In a news conference following the speech, Macklem told reporters that the shelter part of inflation was “much more prominent in what’s holding inflation up.”
Still, he noted that doesn’t necessarily mean officials are ignoring shelter as they set policy to bring inflation back to the 2% target.
“Our target is for total consumer price index inflation, and shelter price inflation is an important part of that.”
In his speech, Macklem flagged fluctuations in oil and transportation costs related to wars in Europe and the Middle East and attacks of ships in the Red Sea.
If there’s more volatility, the focus will be on whether these increases in costs are feeding through more broadly to inflation in other goods and services.
Macklem also looked back at lessons learned during the run-up in inflation, specifically the bank’s decision to keep rates at the emergency lower bound for longer than was necessary after the worst of the pandemic.
“With hindsight, we probably could have begun withdrawing stimulus sooner,” he said.
“When the economy reopened, people wanted to catch up on what they’d missed, but supply could not keep up. This put immediate upward pressure on prices. Once it became clear inflation was not going away, we responded forcefully.”
The BoC next sets interest rates on March 6. — Bloomberg
