National Bank Economist Warren Lovely said the Bank of Canada is in a tough spot ahead of its monetary policy decision Wednesday, given housing markets all over the country are battling affordability.
“We’ve had a significant reliance on housing in our Canadian economic model,” said Lovely, chief rates and public sector strategist at National Bank, in an interview. “At the same time, affordability is getting away from a lot of Canadians and may require a policy response, not just from politicians contesting the election, but ultimately from our monetary policy makers as well.”
The issue for the Bank of Canada, said Lovely, is that it’s no longer a case of just two markets – Toronto and Vancouver – dealing with runaway prices for homes, which policy makers in this country had grown accustomed to.
“We’re seeing an erosion in affordability really across the country,” said Lovely. “If you’re a central banker, it is a bit of a pickle.”
Canada’s central bank will deliver its latest economic assessment Wednesday. Lovely expects Governor Tiff Macklem to keep borrowing costs on hold, given recent economic setbacks including a weaker than expected GDP print, and in the U.S., a downturn for the jobs market and supply chain disruptions in the auto industry.
“Not an easy place for the Bank of Canada,” said Lovely. “Given the risk and given the uncertainty, a sort of stand pat decision perhaps makes the most sense.”
“Suffice it to say there are some question marks around the ability of the labour market to continue to generate good jobs.”
Last week, Statistics Canada revealed an economic contraction of 1.1 per cent in the second quarter. Economists had been expecting growth at an annualized rate of 2.5 per cent.
Lovely said it’s obvious we’re in a distorted environment, and figures the recovery will continue to be jumpy with difficult periods.
“We’re going to be going through the rest of this year, into next year, maybe even 2023, without knowing for certain where the country’s long-term trajectory is taking us,” he said.
“We’d like to see a bit more of a balanced model where businesses are investing, becoming a bit more productive, contributing to the long-term expansion, and yes we also have population growth perhaps through immigration that’s contributing to growth.”
While growth may be stagnating, inflation continues to accelerate. And Lovely isn’t as convinced as Macklem, and his U.S. counterpart Federal Reserve Chairman Jerome Powell, that consumer price inflation is merely temporary.
“We see a lot of reasons to expect inflation to prove a bit sticky,” said Lovely. “To remain perhaps in an uncomfortable zone for central bankers, not just for one or to months but an expected period of time.”