In a recent speech, Bank of Canada Governor Tiff Macklem emphasized the limitations of monetary policy, asserting that interest rates alone cannot resolve challenges like housing affordability.
Key Points Of The Speech
- Monetary Policy Limitations: Bank of Canada Governor Tiff Macklem stressed the inherent limitations of monetary policy, asserting that interest rates alone cannot effectively address challenges like housing affordability. Despite the historical effectiveness of monetary policy in controlling medium-term inflation, Macklem emphasized its inability to tackle short-term price fluctuations and structural issues within the housing market.
- Housing Market Challenges: Macklem highlighted persistent challenges in the housing market, including a longstanding gap between housing supply and demand. Factors such as zoning restrictions, approval process delays, and skilled worker shortages contribute to this imbalance. Importantly, he clarified that these issues fall outside the purview of monetary policy, signaling a need for alternative solutions and policy interventions to address structural barriers.
- Economic Growth Factors: Macklem cautioned against relying solely on interest rates to fuel long-term economic growth. He emphasized that sustained economic expansion requires considerations beyond monetary policy, specifically pointing to the importance of population or productivity growth. While Canada has excelled in growing its economy through workforce addition, Macklem highlighted the need for improved productivity growth, as it directly impacts higher wages and an enhanced standard of living.
Speaking in Montreal, Macklem underscored the historical effectiveness of monetary policy in controlling medium-term inflation but highlighted its constraints in addressing short-term price fluctuations and structural barriers behind the housing crisis.
Macklem pointed out the persistent gap between housing supply and demand, attributing it to factors such as zoning restrictions, approval process delays, and shortages of skilled workers.
Importantly, he clarified that these issues fall outside the scope of monetary policy interventions. The governor reiterated this stance during a House of Commons finance committee meeting, emphasizing that despite public and political inquiries into housing affordability, the central bank’s tools are limited in this regard.
The Bank of Canada‘s recent rate hikes have contributed to increased mortgage interest costs for homeowners and elevated borrowing expenses for developers.
Despite these efforts, high population growth has fueled the housing market, making shelter costs the primary driver of above-target inflation.
With Canada’s inflation rate reaching 3.4% in December and shelter prices surging 6% year-over-year, Macklem acknowledged the challenges but emphasized the central bank’s focus on overall inflation rather than specific sectors like housing.
Macklem cautioned against relying on interest rates to stimulate long-term economic growth, highlighting that sustained growth requires factors such as population or productivity growth.
While Canada has excelled in expanding its economy through workforce addition, productivity growth, defined as increased output per unit of work, has been disappointing.
Macklem stressed the significance of productivity growth in supporting higher wages and an improving standard of living.
Currently, the Bank of Canada maintains its key interest rate at five percent, and speculation suggests rate cuts may commence around mid-2024.
While the central bank refrains from specifying the timing, Macklem indicated a focus on assessing when rate cuts might be feasible.
Economists anticipate that rate cuts could reenergize the housing market, potentially leading to increased home prices as more individuals enter the market.
Early indicators in 2024 signal a rebound in major cities, including a notable surge in home sales in the Greater Toronto Area and Greater Vancouver.
Macklem acknowledged the heightened housing market activity in the central bank’s economic forecasts but emphasized that policy decisions would be rooted in considerations of overall inflation rather than a targeted approach to the housing sector.
