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Posthaste: There's one big factor keeping the Bank of Canada from cutting rates Back to video

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The Bank of Canada’s inflation flight is getting drawn out longer than necessary because of the soaring cost of housing, Toronto-Dominion Bank says.

Rising shelter prices are keeping inflation from reaching the central bank’s two per cent target, and in turn, keeping interest rates higher for longer, according to James Orlando, a senior economist at TD. That’s because shelter inflation accounts for 30 per cent of the consumer price index basket, giving it an outsized impact on the headline inflation reading and policymakers’ interest rate decisions.

“The Bank of Canada’s inflation problem is mostly a housing issue,” Orlando said in a report released Feb. 20. “With shelter inflation accounting for roughly half of overall inflation, this has become the biggest hurdle preventing the Bank of Canada from cutting rates.”

Skyrocketing rents and a record rise in mortgage interest costs are keeping housing inflation running hot. Shelter inflation grew 6.2 per cent in January, up from six per cent in December, according to Statistics Canada. Rents rose 7.8 per cent, compared to 7.5 per cent in December. Mortgage interest costs were up 27.4 per cent in January.

Housing inflation isn’t expected to cool down any time soon. TD expects shelter inflation to run at an average of six per cent over this year, which means getting headline inflation to the Bank of Canada’s two per cent target will be all but impossible.

“The rest of the inflation basket must have close to zero price growth for the Bank of Canada to get inflation down to two per cent,” Orlando wrote. “That is highly unlikely outside a significant recession.”

The Bank of Canada has indicated it won’t cut interest rates too quickly for fear of fuelling shelter inflation even more. But according to TD’s analysis, even early and quick rate cuts are unlikely to have much impact on inflation in the housing sector. Rate cuts would likely bring mortgage interest costs and rents down quicker, but housing prices would also likely increase faster.

At the same time, unless the bank cuts interest rates to two per cent or lower this year, a wave of people renewing their mortgages “are in for a big payment shock,” TD said, which will add to mortgage interest costs. Rent inflation will also remain higher for longer amid strong population growth and a lack of housing supply. Altogether, that will keep shelter inflation high over the next two years, TD said.

With housing causing so many problems, the Bank of Canada might want to consider removing it from its preferred measure, TD said. That wouldn’t be unheard of, because before 2016, the bank excluded mortgage interest costs, among other volatile items such as produce and gas prices, from its CPIX preferred inflation reading. In fact, if the central bank went back to the CPIX, core inflation would have come in at 2.6 per cent in December.

The Bank of Canada now uses three core measures of inflation to guide it on monetary policy. But TD said those measures no longer move with the economy, mostly due to housing. That’s clouding policymakers’ view when making interest rate decisions, keeping rates elevated and extending financial pain for Canadians.

“The longer the Bank of Canada continues to look at inflation through its current lens, the longer Canadians will have to bear the weight of a heavily restrictive policy rate,” Orlando wrote.

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Canada’s inflation rate slowed to 2.9 per cent in January from a 3.4 per cent gain in December, Statistics Canada said Tuesday.

The deceleration was sharper than the 3.3 per cent expected by economists and marks the first time since June that the rate has fallen within the Bank of Canada‘s target range of one to three per cent.

The decline was mostly because of a year-over-year decrease in gasoline prices. Excluding gasoline, the consumer price index slowed to 3.2 per cent year over year in January, down from the 3.5 per cent growth in December. The FP’s Denise Paglinawan has the full story.

• Minister of Public Safety Dominic LeBlanc and Minister of Transport Pablo Rodriguez will be in Montreal to announce federal financial support to combat auto theft.
• Prime Minister Justin Trudeau is scheduled to make a housing announcement in Edmonton.
• The United States Federal Reserve’s Federal Open Market Committee will release minutes from its latest interest rate announcement at 2 p.m. ET.
• British Columbia will release its 2024 budget this evening.
• Today’s data: New housing price index
• Earnings: Nvidia Corp., Suncor Energy Inc., Rio Tinto Ltd., Glencore PLC, Nutrien Inc., Lundin Mining Corp., Gildan Activewear Inc., Bausch + Lomb Corp., Stelco Holdings Inc.

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Now that he’s retired, a reader wonders whether his investment strategy should become less risky as he prepares to switch his registered retirement savings plans into registered retirement income funds. We asked portfolio manager Graeme Egan and financial planner Ed Rempel to help him out.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Read them here.

Today’s Posthaste was written by Victoria Wells, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

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