Bank of Canada ‘Losing the Fight’ Against Inflation, Says Scotiabank Economist

People pass the Bank of Canada building on Wellington Street in Ottawa in this file photo. The Canadian Press/Justin Tang

The Bank of Canada (BoC) needs to continue hiking interest rates or face losing the battle against inflation, says a Scotiabank executive.

“I’m of the ongoing view that politics and pressures aside, it needs to crush inflation risk and remain adherent to its principal mandate,” Derek Holt, Scotiabank vice president and head of Capital Markets Economics, wrote in an Aug. 15 note.

“It is at high risk to [sic] losing the fight.”

Mr. Holt was reacting to the latest Consumer Price Index readings published by Statistics Canada earlier the same day. Inflation rose to 3.3 percent in July after dropping to 2.8 percent in June.

The BoC raised its policy rate to 5 percent on July 12, the second hike in a row after a pause of five months.

Mr. Holt recommends the BoC take a more aggressive stance by not waiting on lagging effects. He says the tightening process started almost two years ago with the shutting down of Quantitative Easing, and the rate hikes started in March 2022.

Quantitative Easing, the practice of central banks purchasing securities from financial institutions, injected massive amounts of liquidity into the economy during the COVID-19 recession.

Mr. Holt says we “should be seeing more evidence of damage now,” in reference to an economic slowdown caused by higher borrowing costs and negative pressures on the labour market.

“The fact that we are not, indicates that policy isn’t as tight as sometimes argued,” he wrote.

Scotiabank’s economic note also mentions the context of workers seeking higher wages amid an affordability crunch, combined with lower productivity inherited from the COVID era.

“The combination is driving unit labour costs skyward and someone will pay for that, including consumers,” says Mr. Holt, with regard to pressures on prices.

“If the BoC does not jolt such developments to a substantially greater degree, then it risks losing control of wage- and expectations-setting exercises and never getting inflation durably down to its target.”

Immigration

The Scotiabank analysis also lists immigration as a factor in driving up housing prices.

“Alas, no one will win a Nobel Prize in Economics for observing that when you add a massive surge of immigration into a market with no supply, rents and house prices will push higher,” he says.

“The argument that immigration could invoke balanced effects on demand and supply side pressures on inflation that cancel each other out was never sensible and we’re getting the kind of persistent housing inflation I’ve warned about since last year when immigration numbers were skyrocketing.”

BoC Governor Tiff Macklem said in his July rate announcement that the effect of immigration on inflation is on net “probably roughly neutral.”

Inflation data published by Statistics Data on Aug. 15 shows that mortgage interest cost rose 30.6 percent year-over-year in July. The agency says it’s the largest contributor to headline inflation.

Rent prices are up 5.5 percent and have reached a national average record of $2,078, according to Rental.ca’s Rent Report for August.

Meanwhile, politicians have steered clear of raising immigration as an issue contributing to inflation.

Housing Minister Sean Fraser, who previously held the immigration portfolio, said on July 26 that immigrants are needed to bolster the workforce to build new dwellings.

Immigration Minister Marc Miller also said on Aug. 11 that immigration targets would not be slashed, raising the same argument as Mr. Fraser and noting that Canada has a duty to welcome asylum seekers “fleeing war and persecution.”

Canada is currently welcoming record levels of newcomers and plans to add 500,000 new immigrants per year by 2025.

Conservative Party leader Pierre Poilievre has been relentless in criticizing the Liberals over affordability, with a focus on housing, but has also steered clear of mentioning immigration as an issue.

He was asked by reporters on Aug. 15 whether he would consider implementing a similar policy as in the 1970s of cutting down on immigration and building more homes.

“To build more homes? Absolutely. In fact, in 1972, we built more houses than we built last year,” he replied, without addressing immigration.

TD Bank economists have also questioned immigration levels in a July report, saying the “high-growth immigration strategy could widen the housing shortfall by about a half-million units within just two years.”