As expected the Bank of Canada has held its trendsetting policy rate at 5.0%. It is the fourth hold in a row.
What did change is the Bank’s thinking about what comes next. Governor Tiff Macklem made it clear the Bank is happy with the way the current interest rate is easing demand and slowing inflation. The Bank is now watching to see how long it will have to keep the rate in place. Macklem also said it is premature to start talking about interest rate cuts.
For the first time the Bank zeroed-in on the impact high shelter costs are having on inflation, calling them the biggest contributors to above-target inflation.
“Mortgage interest costs are boosting inflation to a greater extent than in previous episodes of monetary policy tightening,” the Bank said in its Monetary Policy Report.
There is concern among some market watchers that the Bank’s rate pause could trigger another burst of activity in the housing market, similar to the spike that came after a rate pause early last year.
However, the Bank’s Senior Deputy Governor Carolyn Rogers says the Bank is monitoring risks associated with an “unexpected surge in house prices” putting “upward pressure on inflation”. Rogers also noted, the risk is not in the Bank’s “base case” scenario, and is not driving their decision making at the moment.
Other market watchers worry that maintaining high interest rates will exacerbate high shelter costs, especially higher mortgage interest. They argue homeowners could be forced to shift their spending, pulling money out of the broader economy and creating an even greater slowdown.