Although the Bank of Canada decided to cut interest rates for a third time in 2024 in response to lower inflation, governor Tiff Macklem warned that the country is not out of the woods yet.
However, Macklem said shelter price inflation remains “too high” and is still the largest contributor to overall inflation in Canada. At the previous two rate-lowering announcements, in
June and
July, the governor had also said the country’s housing supply and prices could keep inflation elevated.
In addition, the Bank of Canada mentioned in its latest announcement that wage growth remains “elevated relative to productivity.” In June, Macklem had also warned that this issue could cause inflation to
increase again in the future.While the bank’s three rate cuts signal that inflation is on the right path downward, economists warn that housing prices and low productivity could slow that trend and potentially pause further rate cuts.
“Headline inflation has had a couple of reversals on the way down, so it’s not impossible that there could be one or two more upward blips before it heads back down to 2 percent, and that might cause them [the rate cuts] to pause,” said Steve Ambler, professor emeritus of economics at Université du Québec à Montréal.
High Housing Costs
Mortgage costs in Canada have remained high as a result of the Bank of Canada’s interest rate hikes, but those costs will come down as the rates decrease, Ambler said. However, he said the “big factor” driving high prices in the rental market is increased immigration putting a squeeze on housing supplies.
Immigration has increased at a record pace in recent years, with targets set to reach
500,000 by 2025 and the number of temporary residents more than doubling from 1.3 million in the third quarter of 2021 to
2.8 million in the second quarter of 2024. At the same time, average rental prices began increasing in April 2021 and hit their
all-time high in May 2024.While federal Immigration Minister
Marc Miller recently announced Ottawa is taking steps to reduce the number of temporary foreign workers in Canada, Ambler said those policies will take a while to kick in.
He said legal immigrants, temporary foreign workers, and international students are “all putting a lot of pressure on rental prices in Canada, and it’s something that the bank has essentially no control over.”
Economics professor Livio Di Matteo at Lakehead University said that while Statistics Canada’s latest consumer price index
report, for July, showed year-over-year overall inflation falling to 2.5 percent, a
closer look at the data shows the cost of shelter continuing to grow at 5.7 percent. Meanwhile, the cost of health and personal care was growing at 2.9 percent, food at 2.7 percent, and transportation at 2 percent.
Even with interest rates coming down, it will not have much of an impact on housing prices, Di Matteo said, adding that high prices are a combination of “more rapid population growth,” a shortage of skilled trade workers, and an emphasis on highrise condos instead of affordable units for families.
Richard Dias, a global strategist at PGM Global and host of the podcast “
The Loonie Hour,“ agreed. ”Rent is [rising] at 8.5 percent year over year, and that’s driven almost entirely by the unsustainable population growth,” he told The Epoch Times, referring to StatCan’s July CPI report showing the rent index continuing to increase year over year.
“Rent is a non-trivial sum of that shelter component” in the CPI basket of goods and services, Dias noted.
The other biggest components of the
CPI basket include transportation and food.
The components are given different
weights in calculating the all-items CPI according to their relative importance in consumers’ total expenditures. Canadians spend a much larger share of their expenditures on rent than on milk, for example, so a 10 percent price increase in rental rates will have a greater impact on the CPI than the same increase in the price of milk, StatCan explains.
Productivity Remains Low
In March, the Bank of Canada’s senior deputy governor, Carolyn Rogers, said the country’s
low productivity rates had become an “an emergency” that could harm the country’s long-term growth. She said productivity is a way to “inoculate the economy against inflation” and that a country with low productivity can “grow only so quickly before inflation sets in.”
Di Matteo said Canada’s low productivity, which is a “long-standing issue,” can potentially be remedied by lower interest rates that would boost capital investment. But he said lower interest rates previously “distorted a lot of our investment [in] housing” and other areas of the economy that “might not necessarily enhance productivity.”
“Capital investment is the way to go [to increase productivity], but that has to also be accompanied by some structural reforms in the Canadian economy,” he said. “In the end, our productivity is probably low because we are in an economy that’s always been very comfortable with oligopolies and monopolies.”
Dias said low productivity rates combined with high population growth means that whatever the Bank of Canada decides for its interest rate “is necessarily going to be higher than it would have been if population growth was slower.”
